OPEC: Beginning of The End?

The recent uprising in North Africa and the Middle East (MENA) region, which culminated in an UN sanctioned military acton against Libya, suggests that the eventual break-up of the 'Organization of the Petroleum Exporting Countries' (OPEC) could be near.  OPEC is an organization consists of twelve oil exporting countries, namely, Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela (See Chart). The organization is considered a cartel, while some are more progressive than others, the majority of OPEC members are governed by essentially autocratic system of governments.

The start of the break up may have been on September 10, 2008, after an OPEC negotiating session in Vienna where the organization voted to reduce production.  Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. One of their delegates was quoted as saying "Saudi Arabia will meet the market's demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed."  [Source: The New York Times, Sep. 11, 2008]

The U.S. imports crude oil from many other countries, but three OPEC members are still among the top five of countries from which we directly receive shipment of that precious commodity. Here is how they rank per the latest report from the EIA:

December 2010 Import Highlights: Released February 25, 2011

However, breaking up with OPEC may be pulled off without as much effort as one might think.  That old Neil Sedaka song "Breaking up is hard to do" comes to mind when you realize our love-hate relationship may finally lead to a divorce that will relieve the U.S. from our dependency on imports from some hostile countries.  That leads to the reason for this article on why OPEC's existence may be in its final throes and is coming to an end.

"Ummah" means unity among Muslims - One nation and one people. Many have tried to bring Ummah to the Muslim nations.....and failed, with oil prices spiking tick-by-tick to geopolitical events in the Middle East and North Africa (MENA). 

The invasion of Kuwait by Saddam Hussein brought the United States and England into the region to liberate Kuwait. This cycle continues even today with vast crude oil reserves at stake.  Since then, the region has been in constant turmoil with half a million casualties in the six-year war between Iran and Iraq alone in the 1980's. Now, the Bahrain and Yemen conflicts are continuing with Egypt, Morocco and now Libya prominently in the news.

Disruptions have spread across MENA.  Libya's 1.6 million barrel crude oil exports are almost entirely halted and renewed unrest in Oman, Iran and Iraq have rattled crude oil traders. An interruption of shipments from any of those countries would further tighten oil supplies, even as Saudi Arabia has rushed to fill the vacuum of Libyan supplies by pumping more oil from its fields.

Oman, which is a normally stable Persian Gulf country, ruled by a family dynasty and the largest non-OPEC oil producer in the Middle East, is now in trouble as well.

Refiners around the world have been hoping that Iraq, as violence ebbed, would again become a major oil producer, with production stabilizing at 2.3 million barrels a day. But rebels bombed the country's largest refinery, reducing the refinery's capacity to refine petroleum products by 75,000 barrels a day. This was on top of a terrorist attack on a pipeline leading to a second refinery north of Baghdad.

Saudi Arabia has a total production capacity of 12.5 million barrels a day, and currently produces nine million barrels after increasing its output by several hundred thousand since the beginning of 2011. Saudi Arabia said they are ready to pump what it takes to fill any supply gap, but much of its 3.5 million barrel excess capacity contains sour crudes, which does not easily replace the Libyan sweet crude European refineries in particular desire to produce diesel. 

Donald Trump recently responded to speculation that the turmoil in Egypt and other countries in the Middle East could push oil prices to as high as $200 a barrel by stating that "The Middle East...is going to explode. OPEC will probably be destroyed if it explodes, and oil prices could go the other way."

T. Boone Pickens, a veteran oilman, also put a short-term oil price spike at $120 druing a recent CNBC interview, and reiterated the United States needs an energy policy that addresses lessening OPEC-dependence.

Both Pickens and Trump may just be correct that the current revolts and conflicts in the Middle East and North Africa will cause an upheaval in the world oil markets enough to bring about the end of OPEC.

We will have to change from humming that Neil Sedaka song to learning the lyrics to "O Canada" and "Himno Nacional Mexicano".

By Bob van der Valk & Dian L. Chu

Dian L. Chu is a market analyst, founder and editor of EconMatters.