Conventional wisdom among those that follow energy markets and oil in particular is that OPEC is not what it once was. For a few decades the cartel of oil producing nations was both feared and revered around the world. They had the power to effectively set the price of oil in the global market and, in using that power, could alter the economic conditions in all of the world’s major powers. Why that is no longer the case is a complicated question, but one which bears examining, especially now that crude has collapsed out of its range even as an OPEC meeting approaches.
There are several theories as to why OPEC’s power has been so severely reduced and as is often the case the reason is probably a combination of all of them. First, and most obviously, the U.S. and other nations have been able to increase production due to new technologies and techniques, in particular horizontal fracking. What is interesting though is why, given the opportunity to increase production, the U.S.A. and many other countries have elected to do so. That may seem like a strange question to ask, but in the past an understanding that oil was a finite resource and that it had to be used sparingly. That has, however, changed.
The irony here is that the reason for the change is the rise of alternative energy. As technology and political will advance solar, wind and other renewable energy sources to the point where they become commercially viable the pressure to preserve precious stocks of oil has lessened. The world is still dependent on oil and using it up at a pretty alarming rate, but the day when that is no longer the case is clearly in sight. Pumping like crazy isn’t as crazy as it once seemed, even for big oil companies. Related: Kuwait Sees $80 Oil By 2020
That explains to some extent the commercial decisions to stop worrying about preserving oil stocks, but what has caused the shift in the global political landscape that has resulted in governments allowing that to happen? In part the fault here lies with OPEC itself. The old political cliché that power corrupts and absolute power corrupts absolutely can be applied here in economic terms. OPEC’s ability to cause “oil shocks” in the last part of the last century gave them political as well as economic clout and as the Middle Eastern cartel members hinted at using that, so the push back started.
There is also a strong case to be made that, regardless of any of the above, OPEC was destined to be a relatively short lived phenomenon and was doomed to failure from the outset. It included a range of nations, some of whom, again particularly in the Middle East, were sworn enemies in all other things but were united in their attempt only to maximize oil revenues. That was always a precarious balance to maintain and as politics has moved to the extremes it has become even more so.
Saudi Arabia and Iran, for example, continue to fight proxy wars around the region, even while negotiating together at OPEC meetings. It is little wonder then that the cartel members increasingly distrust one another. That has been the case for a while, but remained OPEC’s dirty little secret until fairly recently. The now replaced Saudi oil minister Ali Al Naimi let that particular cat out of the bag as the most recent round of supply cuts were being proposed, saying that cuts were pointless as nobody actually stuck to them. He was relieved of his duties shortly thereafter, which could, of course, be a complete coincidence… Related: Oil Prices Crash To Pre-OPEC Deal Levels
There are, as you can see, a lot of things that have combined to make OPEC less formidable than they once were. Do not, however, make the mistake of concluding from that that the cartel is now completely irrelevant. The fact that their ability to control prices through action is reduced will, if anything, increase the likelihood that they will aggressively talk their book. The next scheduled OPEC meeting is on the 25th of this month, so lots of talk of unity and deeper cuts to production over the next couple of weeks would come as no surprise.
Undoubtedly OPEC is not what it was. Meetings are no longer awaited with bated breath by the world’s energy consumers and many otherwise informed people are only vaguely aware of what the organization is or does. That situation has come about gradually and as the result of a range of changing circumstances and the decline is still ongoing. Reports of the cartel’s death, however, are somewhat premature. There is life in the old dog yet and an aggressive campaign of talk over the next few weeks could well provide crude with some much needed support.
By Martin Tillier of Oilprice.com
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