60 Years on, Is OPEC past its sell-by date?

[nehad ismail + 6]

 

60 Years on, Is OPEC past its sell-by date?

 

On October 16, 2013 a Foreign Policy article carried the caption: The End of OPEC. Seven years later OPEC is still around and very much alive.

The Organization for Petroleum Exporting Countries (OPEC) has controlled oil production levels and price movements, almost unchallenged since the early 1960s. The famous five who founded OPEC are Saudi Arabia, Iraq, Iran, Kuwait, and Venezuela.  The remaining members who joined later are Qatar (1961) (since suspended membership), Indonesia (1962) (since suspended membership), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973) (since suspended membership), Gabon (1975), Angola, (2007), Equatorial Guinea (2017) and Congo (2018).

 

OPEC’s aims and objectives

OPEC was created in 1960, based on principles that include the coordination of the Member Countries’ oil policies, so as: to ensure price stability in the world oil market; to obtain a stable revenue for oil-producing nations; and to provide a regular, reliable, efficient and economic supply to consuming countries and a fair return to investors in the oil industry. These are OPEC’s own words in brief.

 

How much oil does OPEC Produce?

OPEC member nations produce some 32 million barrels per day, almost a third of the global oil output which had given them a clout and influence in the oil market.

In summer of 2014 Oil prices collapsed. OPEC stood powerless for three years until it forged a price cut agreement with Russia and others in January 2017. In May 2018 the price of crude oil had touched $80 a barrel.

Recently and also in the last few years there have been media speculation that OPEC is losing its influence over prices and is becoming irrelevant.

 

Is OPEC becoming less powerful?

The Wall Street Journal reported in November 2016 that OPEC appeared powerless to stop a slide in prices that has punished the economies of oil-dependent members, including Saudi Arabia. For a number of years and at least from 2014 when oil prices began to slide from $115 per barrel to below $30 in early 2016, many experts and business journals began to question the relevance of OPEC.

But the question is why prices remained so weak particularly in the last four months or since the beginning of 2020? Apart from the eruption of the Corona Virus or Covid19 which destroyed demand for energy and oil in particular since February this year and the price war between Russia and Saudi Arabia, there are other important factors that prevented prices from rising.

First and foremost, the build-up of oil inventories in the USA and the OECD (The Organization of Economic Co-Operation and Development) countries which dampened spikes in crude oil prices.

 Secondly the rapid rise in the production of shale in the Permian basin which, according to Chevron is a “shale basin about 250 miles wide and 300 miles long, spanning parts of west Texas and South-eastern New Mexico. It includes the highly-prolific Delaware and Midland sub-basins”. Also the Bakken fields in North Dakota.  The Bakken formation has emerged in recent years as one of the most important sources of new oil production in the United States.

Thirdly oil production from non-OPEC sources have increased considerably in recent years.  Canada, Brazil, Norway, Russia, and the USA which account for some 35 million barrels per day during 2019, outstripping the entire production of OPEC. . So the dominance of OPEC has been diluted. It cannot call the shots anymore. As prices plunged to below $20 per barrel in April, OPEC was unable to stop the collapse of prices to levels unseen since 1991.

 The most recent agreement for OPEC, Russia and others to cut oil production by 9.7 million barrels per day which came into effect May the 1^st, was a result of US President Trump’s personal intervention. He put pressure on the Russians and the Saudis to reach agreement and cut oil production. President Trump’s aim was to save the shale oil industry from collapse due to low prices. For OPEC this agreement emphasized the need for the cartel to forge alliances with non-OPEC producers such as Russia in order to secure some influence over production and prices. The market wasn’t impressed by the 9.7 million per day cut. Oil market traders ignored the cut and prices continued to slide. The Paris based International Energy Agency estimated that the markets are over supplied by some 30 million barrels per day, so even after the cut, the global excess is 20 million barrels per day.

According to media reports the most quoted reasons for the falling prices are the collapse of global demand and the very limited storage capacity for the surplus oil.

 

US is top producer, but Saudi Arabia is top Exporter

Prior to the recent agreement, Riyadh and Moscow each produced in excess of 10 million barrels per day. The combined total production of OPEC is around 32-33 million barrels per day. But oil production in Libya, Nigeria and Venezuela, all members of OPEC, has declined due to instability and security problems. Even Iraq which is one of the founding members of OPEC is struggling to maintain oil production due to lack of political stability. With all these problems among OPEC members, you might think oil prices should logically go up... But they will not in the short term.

As long as the prices remain above $40 per barrel, US shale oil producers, as well as conventional off-shore producers, are making money.
In the final analysis, while the US is becoming top dog in terms of oil production, Saudi Arabia maintains its position as top oil exporter.

Whatever oil analysts think, OPEC will remain an important element in the oil supply equation for many years to come. Current estimates show that OPEC accounts for 80 per cent of proven oil reserves and over 30% of world oil production. The sums are all currently in OPEC's favour. In the Middle East, production costs per barrel vary, but remain in the range of US$10 to $15. So OPEC producers remain in profit at prices well below US$35 per barrel. At a price of $40, Russia breaks even. Shale oil producers struggle. But prices below $30 per barrel is a suicide for the US Oil Industry.

OPEC is definitely weaker and less influential than it used to be, but it will not disappear and its demise is not imminent.

 

Nehad Ismail

UK based commentator on energy related issues

[canadas canadas + 136]

A large part of OPEC.ORG (Organization of Petroleum Exporting Countries) is OAPEC.ORG (Organization of Arab Petroleum Exporting Countries).  As a matter of fact OAPECORG.ORG members have over 50% of the world's crude oil reserves. 

Edited May 4, 2020 by canadas canadas

[canadas canadas + 136]

OAPECORG.org website works but OAPEC.org does not.