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The End Of OPEC Is Near

OPEC

OPEC, which has far exceeded the average life of cartels, is on the brink of failure. Though cracks have been developing in the cartel since the start of the current oil crisis, the group has managed to stay together so far. Nevertheless, the success of the current OPEC deal for production cuts will decide its future as a cartel.

What is a cartel?

A cartel is a group of like-minded producers, who act in concert—or collusion—to achieve a shared goal of increasing their profits by means of restricting supply, fixing prices, or destroying their competition by illegal means. The average life of the 20th Century cartels has been 3.7 to 7.5 years, according to various studies by Margaret Levenstein and Valerie Suslow. In the past two centuries, cartels have been able to influence prices by an average of 25 percent.

History of OPEC’s success in boosting oil prices

Since its inception, OPEC has been fairly successful in boosting prices by various means. A few of the price increases, however, were due to reasons other than direct OPEC action, nevertheless benefitting their members.

Though the 1973 oil embargo was brought on by political reasons, OPEC used the production cuts of the embargo to boost oil prices from $3 a barrel in 1973 to $12 a barrel in 1974.

The 1979 energy crisis was not a brainchild of OPEC. The production dropped due to the Iran-Iraq war, and the price of oil doubled in about 12 months, again benefitting OPEC members.

OPEC was able to boost prices using production quotas and production cuts following the Asian Financial Crisis in 1997.

What has OPEC done to support oil prices in the current oil crisis?

OPEC, as any cartel would, has used two strategies to influence oil prices. However, both have been unsuccessful in achieving their objectives. Related: These Fundamentals Point To Higher Oil Prices

In 2014, Saudi Arabia, the de facto leader of OPEC, attempted to stifle the competition of the shale oil drillers by keeping their production intact. As a result, oil prices plummeted to multi-year lows of about $27 a barrel in February 2016. The drop in oil prices saw 119 North American oil and gas producers file for bankruptcy from the beginning of 2015, according to Haynes and Boone, LLP.

U.S. oil production dropped about 883,000 barrels a day by August 2016, after topping out at 9.7 million barrels a day in April 2015. Nevertheless, the price decrease went well below OPEC’s expectations. Meanwhile, many shale oil drillers used a combination of better technology and hedging to continue pumping oil, despite the low prices.

As its first strategy failed to effect the U.S. shale oil production to the extent presumed, OPEC then adopted a second strategy of cutting production. On November 30, OPEC sealed a deal to cut production after months of difficult negotiation. Though prices bounced and broke out of the $52 levels – a strong resistance – they could not reach the $60 levels preferred by OPEC members.

However, this modest rally in crude oil prices rejuvenated the U.S. shale oil drillers, and U.S. oil production is now on the rise. As a result, crude oil has dipped again and is hovering near the $50 per barrel level.

The market believes that if crude oil prices remain above $50 per barrel, U.S. shale oil production will increase. For this reason, OPEC is finding itself in a catch-22 situation: It is losing market share to the U.S. shale oil drillers, but it is unable to propel prices considerably higher. It is losing its ability to influence prices above a certain level. Related: What Gold Can Tell You About Oil Prices

What happens if the Cartel fails in its objective

A cartel is able to hold its members only when it fulfills their objective of higher prices, which has not been the case with OPEC. The member nations will now look to fulfill their objective by cheating and acting individually, according to their requirement.

Saudi Arabia, which was the leader of OPEC and the price setter of the world, is losing its clout in OPEC. Even in the current round of production cuts, most of the work is being done by Saudi Arabia, whereas the other members are shying away from their designated quotas.

OPEC has far outlived the average lifespan of a cartel, but if the OPEC members don’t regroup and act together, chances are that the cartel will come to an end very soon.

By Rakesh Upadhyay for Oilprice.com

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  • John Shannon on April 02 2017 said:
    You don't mention why OPEC has out-lasted most other cartels though. OPEC is a cartel unlike any other - you can't rule out the massive amount of geopolitics involved. Indeed a lot of these regimes have no choice but to make OPEC stagger on as best it can.
  • jack ma on April 02 2017 said:
    Article may really mean the end of the petrodollar is near. The OPEC nations simply executed the oil for dollars plan now for 45 years according to the de facto owner of Saudi oil - Exxon Mobile. With no more petrodollar sales the cartel no longer serves the purpose of it's Western Puppet Master. The true story...IMHO
  • Muhammad on April 03 2017 said:
    I think the media will loose this war against oil price humiliatingly. The oil demand is increasing as is visible by draw down in American stores. Crude stores will start to come down soon. The oil prices are bound to go up. Even with the hoped 500000 barrels shale can supply by the end of yeah 2017, the demand will outweigh it, and severely so if OPEC continued it's cuts through the year. Then these same so called experts will make some other excuse and will not even mention these predictions. Almost every expert said OPEC could not agree on a cut. They we're all proven wrong. Then they said OPEC will start cheating. They are proven wrong once again. Now they are saying shale will outweigh the production cuts by OPEC. They will soon be proven wrong.
  • petergrt on April 03 2017 said:
    Considering the fact that OPEC violates the US antitrust laws, the US should impose a say $10/barrel surtax on all oil imported from OPEC and countries participating in schemes to manipulate oil prices.
  • Nizam Shirin on April 03 2017 said:
    first of all, you keep saying cartel. OPEC is not a cartel when it manages 33% of production. secondly, members have always cheated but OPEC has stayed strong. Acting alone is not gonna work for any of them. It's been quite some time they did not have an agreement now they had on January. I think they are getting stronger rather than weaker.
  • Clarence Edgar on April 05 2017 said:
    The US Antitrust laws regulate business entities, not countries. OPEC is made of countries as members; as such, it is outside US Antitrust jurisdiction.
  • John Brown on April 05 2017 said:
    A good article. Everybody knows that OPEC members are mostly cheating on the production cut backs and that Saudi Arabia has taken on more and more of the burned and is losing market share for its efforts. Better yet keeping oil propped up around $50 a barrel when there is a glut of oil sloshing around the world had stabilized and is know increasing U.S. production. Producers in the U.S. have improved efficiency and technology and the cost of producing is dropping like a rock which means with prices artificially fixed around $50 that the U.S. can and will continue to increase production and make money at it while lowering cost even further to be ready for $30 a barrel oil again. The reality is there is NO reason for oil to be above $30 a barrel even with OPEC, through Saudi Arabia's efforts, not quite meeting their cutback quotas. Even as I right this article more OPEC members are increasing their production capability as is the U.S.
    The longer Saudi Arabia almost single handedly loses market share to keep more oil from flooding an already flooded market the more U.S. production will increase as it grabs more market share. The facts are that shale oil & gas in the U.S. and elsewhere is getting cheaper to produce and can come to market in months now rather than years, even as renewable forms of energy continue to come online at every lower prices. Lower oil prices are here to stay, and even go lower for years to come no matter how the entire industry and its support industries fight to keep the price artificially high.
  • Alec Taprobane on April 05 2017 said:
    "The US Antitrust laws regulate business entities, not countries. OPEC is made of countries as members; as such, it is outside US Antitrust jurisdiction." --Clarence Edgar

    No one is talking about hauling OPEC countries into an American court of law for prosecution. What we are talking about is adding a surcharge to OPEC oil imports to punish them for behavior inimical to American interests. It's called "diplomacy", and it takes place every day among sovereign nation-states.

    In other words, "Nice strawman you had there... shame something happened to it."
  • EH on April 09 2017 said:
    I liked 3 buck oil,, and my 71 AMX,, 32cent Marlboros too, let's go back to that!
  • D Urban on April 17 2017 said:
    It is safe to say that the American's are winning with their shale fracking technology. Little by little they are gaining market share and will become the winner for decades to come.
  • Timmie Tee on April 28 2017 said:
    OPEC is not going anywhere when they have 30% of the world's oil at $7 cost. Fracking will keep oil under $60 for a while, but when cheap loans and the backlog of wells dry up, its upside is limited. Plus, drilling and opex costs are too high for fracking to be a long-run, sustainable source.

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