Goldman Speculates On The Future Of OPEC

Goldman Sachs shouldn’t worry about the future of OPEC. Its position in the global oil market is unassailable.

September 14, 2020 marked the sixtieth anniversary of OPEC – almost two thirds of a century of existence characterized by embargo, conflict, oil price wars and even wars.

However, the greatest challenge OPEC has so far faced in its history was the COVID-19 pandemic, an event which will go into history as the most destructive event that has hit the global economy in almost a century.

The formation of OPEC marked a turning point toward national sovereignty over natural resources and OPEC decisions have come to play a prominent role in the global oil market and international relations.

Decision-making inside OPEC is quite complicated most of the time. This is because the policies of its de facto leader Saudi Arabia sometimes differ radically from those of other OPEC members’ in relation to prices and supplies.

Many analysts erroneously call OPEC a cartel. But OPEC isn’t a cartel and has never been or ever behaved like one in its entire history.

A cartel is defined as an association of manufacturers and suppliers whose goal is to increase their collective profits by means of price fixing, limiting supply, preventing competition or other restrictive practices.

How could OPEC be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel of western multinational oil companies which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits. The main purpose behind the founding of OPEC was to give producers more control over their own oil.

However, OPEC has never once tried to fix a specific price, nor has ever been able to achieve this goal. Wishing a certain price is totally different from fixing it. The fundamentals of the global oil market are the ones that have always determined the oil price helped occasionally by geopolitics. OPEC has no control on these fundamentals and, therefore, has no control on the movements of prices. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel, nor was it able to stop the 2014 oil price crash.

When it comes to limiting oil supply, a true cartel like the “Seven Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 42.0% of the global oil market with the rest of the oil-producing nations of the world accounting for 58.0%.

Only OPEC+ production cuts stood between the destructive power of the pandemic and the collapse of the global oil market and the whole oil industry. OPEC+ efforts to stabilize the global oil market and prices were acknowledged worldwide even grudgingly by the United States.

On its sixtieth anniversary, both the global economy and the global oil market owe OPEC+ an extraordinary debt of gratitude.

Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London