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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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Is It Time For OPEC To Dissolve?

OPEC

OPEC is no longer functioning as a cohesive group. Is it time for OPEC to finally dissolve?

The major oil-producing countries in the world heavily depend on the income from oil. A sharp drop in oil prices has rendered them vulnerable to terrorist attacks and political uprising. As members of the Organization of the Petroleum Exporting Countries (OPEC), these countries previously wielded power over oil prices and enjoyed the benefits of high oil prices.

Unfortunately, the oil cartel is no longer behaving like a cohesive group, and infighting among the member nations is doing more harm than good.

Add to that the emergence of the shale oil drillers with their short production cycle that has rendered ineffective OPEC’s capability to influence prices.

OPEC member countries are now struggling to fund their own budgets in the wake of falling oil prices, and as a consequence, are no longer in a position to help each other financially. The geographical distance between the nations also makes any coordinated action more difficult. Related: Oil Outages Come Back Online, Cause Large Downside Risk

Add to that the fact that whenever the group meets, Iran and Saudi Arabia are on opposing sides. One scuttles the proposal of the other and because of this, OPEC has been unable to pass any meaningful resolution during the past few meetings.

The combined effort of OPEC and Russia to freeze production has failed, with Saudi Arabia refusing to take part in any proposal that did not include Iran. The net result is that the countries no longer see any benefit from their OPEC membership.

The H.R. 4559 bill, which proposes a commission to investigate the OPEC, will further strain ties between the U.S. and the influential OPEC nations.

The group is no longer serving its purpose, leaving one to wonder if it is not high time for OPEC to dissolve.

The Gulf nations might be better served by strengthening the Gulf Cooperation Council (GCC). The member nations of the GCC (Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates), are major oil producers who hold 40 percent of the world's oil reserves.

Due to their similar beliefs, oil dependency, and geographical closeness, they are in a much better position to help each other. However, in order to expand their reputation, they would need to follow the successful, single-market policy of the European Union and project a united front for all their business dealings. Related: Shilling's $10 Oil Prediction Is Not Completely Ridiculous

The GCC may also be better served by abandoning the policy of manipulating oil prices. The aim should be to leverage their respective oil behemoths, the Saudi Aramco, Qatar Petroleum and Kuwait Petroleum—united these three can significantly garner market share in Asia.

If they are able to do so, they will not only form profitable business ventures, they will also form strong political partnerships with the EU, the U.S., and the other Asian countries.

It’s time the gulf nations abandoned the battle to control oil prices and work for their own good.

The remaining countries in the OPEC—the weaker members—gain nothing from OPEC now that the larger, more powerful countries in the group have failed to protect their interests during the worst oil crisis in decades. They, too, will be better off forging ties with other friendly nations where their opinions are heard and respected.

By Rakesh Upadhyay for Oilprice.com

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  • Seth on July 05 2016 said:
    OPEC exists today in name only as the Shale Revolution has permanently destroyed their leverage. However, they're not going to dismantle the bureaucracy, the cushy meetings, or admit their defeat by dissolving their dead organization.

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