In my previous column I pointed out that slowly, but surely, oil prices’ fall since mid-June has been due to faltering demand, increasing supplies, dollar appreciation, the slowdown in European economy and the less than expected growth elsewhere.

While the price slide has slowed and some crude oils witnessed a rise due to a sudden and unexpected stock drawdown in the US, analysts still see the price direction as headed downward. The price of Brent oil rose to $97 (Dh356) a barrel on September 25 while the Opec basket of crude oils declined slightly to $94.25 a barrel. The US Energy Information Administration (EIA) now expects oil prices to stay below $100 a barrel until the end of the decade.

The signals that Opec may reduce its production ceiling by 0.5 million barrels a day (mbd) at the next ministerial meeting in November may not be enough to stabilise the market, especially if further declines are seen from now up to the date of the C meeting. If Opec is serious about price maintenance at some level — and thereby arrest further price erosion — it would be a good idea to start now to seek co-operation from other producers.

Russia, for instance, is suffering from sanctions imposed on it by the West due to the Ukraine crisis, and which is unlikely to go away in the near future. Declining oil prices will no doubt add to the woes of the Russian economy which depends on oil to provide 70 per cent of the country’s total exports.

Maksim Oreshkin, head of the Russian Finance Ministry’s strategic planning department, said sanctions and sinking oil prices may knock 4 per cent of its gross domestic product (GDP), as reported by Reuters. For political reasons, Opec may find it difficult to approach the Russians as its members may not want to be seen aiding its position on the Ukraine crisis. But if the approach is made to a number of non-Opec oil producers such as Norway, Oman, Malaysia, Kazakhstan and Azerbaijan,it may be more palatable.

Opec countries need to stave off further drops as they have gotten used to high oil prices in the last decade or so and cannot afford steep declines as this may affect their budget balances, though some members are better than others in this respect.

One Opec member deserves special mention. Iraq is now engulfed in a vicious circle of violence but is bent on increasing its production, which was 2.8 mbd in January 2014 and has risen to 3.2 mbd by mid-year in spite of the loss of all its Kirkuk production. While southern production is expected to increase further, this will undoubtedly pressure oil prices at a time when Iraq is faced with rising cost of investment and production.

Incremental production

Before 2003, the thinking was that the average total cost in Iraq was $2 a barrel, while the current average cost is believed to be close to $10 a barrel. It may be double for the new incremental production. Therefore, Iraq is in a Catch-22 situation. If it increases production, prices may go down and if it does not, then it has to pay the international service contractors their fees and cost.

Another Opec member is faced with a different kind of problem. Saudi Arabia in the last year or so has commissioned two world-scale refineries of 400,000 barrels a day each, one in Jubail in a joint venture with Total and the other in Yanbu, which is a joint venture with China’s SinOpec.

Both are sophisticated plants and geared for the export markets of the world. But the slowdown in demand and decline in some markets such as Europe will make refiners worldwide, including Saudi Arabia, struggle to achieve a decent margin on profit and higher utilisation rates when they really need them to recover the huge investment.

One encouraging factor is that shale oil production may not rise as fast as previously thought due to the decline in oil prices. The US tight oil production may have risen by some 3.3 mbd in the last four years and may rise by another 1 mbd next year. But any further decline in prices may even stop some of the projects currently on the drawing board. The same is true for the oil sands of Canada.

Therefore the cushion that is encouraging the US and its allies to go into another prolonged war in the Middle East may be at risk if prices are heading — as some analysts are predicting — to $70 a barrel.

It is unfortunate that “the Middle East is busy killing itself” with so much violence and chaos at a time when oil revenue should be protected and surpluses should be employed to develop these countries further.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.