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OPEC Reinvents Itself

Specials- OPEC
Saudi Arabia’s Energy Minister Khalid al-Falih (L) speaks to journalists as he attends the 175th OPEC Conference of Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria on December 06, 2018. Photo AFP

Ever since Qatar announced that it was pulling out of the oil-producing bloc by the beginning of next year, predictions of the death of the Organization of Petroleum Exporting Countries (OPEC) are once more ubiquitous, stroking fears that other members may follow suit.

Qatar, after all, was one of the first Middle Eastern countries to join the bloc in 1961. At the time, the world would have moved mountains to acquire oil, while Qatar had few other sources of wealth. And while Saudi Arabia dominated OPEC, the organization as a whole had the power to plummet the world into a recession with a single decision.

American oil expert Morris Adelman was one of many who, in the past, had perceived OPEC to be a monstrous and self-serving cartel. Whenever the organization appeared to be losing relevance, Adelman was quick to predict OPEC’s demise.

In 2001, he wrote that the organization was failing to accurately forecast the market demand or production of oil, causing some of its members to act unilaterally behind closed doors. The consequence, he noted, was the unpredictable and sudden change in global oil prices.

Fast forward 15 years and Adelman’s predictions seemed to be prescient. In June 2016, OPEC members met in Vienna but failed to agree on measures that would support the price of oil and alleviate the economic pains of major oil producers. Worse still, the bloc couldn’t even agree on an overall cap or supply limit for each member.

“OPEC has lost control of oil markets and shows no sign of the collective discipline necessary to get it back,” lamented Jeremy Warner, a columnist for The Telegraph, a British daily.

The fact that each member had a different economic issue was the root of the problem. The business relationship between Saudi Arabia and Iran – arch-rivals in the Middle East – is a case in point. The former wanted to let market forces dictate the price of oil to eliminate its competitors. The latter was pushing to increase its oil production to revive a cash-starved economy resulting from years of sanctions.

Despite the tensions, and the countless doomsday prophecies that followed, OPEC managed to reinvent itself in March 2018 by signing a pact with Russia to cut oil supply. While the total collapse of Venezuela’s oil industry also helped shrink oil production, it became clear that there was now greater cooperation between OPEC and non-OPEC countries than ever before.

However, the deal with Russia risked antagonizing US President Donald Trump, who has privately asked members of OPEC to increase production to lower global prices.

OPEC’s bigger concern is that US oil production has been soaring since 2011 because of fracking, a process where underground rocks are blasted with high-pressure liquids to tap into the oil and gas inside. This unconventional supply is known as shale oil, which OPEC was anticipating would dry up. But as prices tumbled between 2014 and 2016, OPEC finally decided to limit supply.

Shale’s dominance, coupled with divisions between OPEC members and their non-OPEC allies, had some experts predicting the organization would fail. One prominent commentator in the Financial Times even declared that OPEC’s reliance on major oil producing countries foreshadows its demise.

It is now clear all those experts were wrong. While OPEC may not be as powerful as before, it is still very much alive. Its alliance with Russia enables the organization to cooperate with 10 other non-member states, which is vital to limiting global oil prices, since OPEC only accounts for 40 per cent of the world’s total supply.

Jason Bordoff, a former senior director at the US National Security Council, also emphasizes that Riyadh’s cooperation with Moscow ensures the latter will have a very prominent voice in regulating oil prices for years to come.

That said, Saudi Arabia still wields the most power. On 10 December, the kingdom convinced two dozen oil producers to cut their supply.

Most experts expected Saudi Arabia to cut production, considering that the kingdom needed the price of oil to rise to balance its budget, according to the International Monetary Fund (IMF). It was also clear that Saudi Arabia would be cutting the most, since it supplies twice as much oil as the next largest OPEC producer.

“Despite talk of peak oil demand and US “energy dominance,” the direct impact of that deal on US gasoline prices is a reminder that oil remains a geopolitical vulnerability for the United States and that talk of its “energy dominance” has been over-hyped,” wrote Bordoff in Foreign Policy.

Trump, however, appears willing to do whatever it takes to drive oil prices down. There are even reports that there is renewed interest in the No Oil Producing and Exporting Cartels Act (NOPEC), legislation which was crafted during the presidency of George W. Bush.

Such a law would expose OPEC members to US lawsuits. In particular, the bill would make it illegal for OPEC members to withhold oil or gas or to set the prices. Saudi Arabia is pressuring the Trump administration to obstruct the bill, while major oil companies warn that other countries could retaliate against the US if the bill passes.

Unlike former US presidents, Trump could back the bill to win popularity before the next election. That move would lower oil prices and allow Trump to portray himself as a strongman clamping down on the Saudis and Russians.

“OPEC is a pet peeve for [Trump],” said Joe McMonigle, senior energy policy analyst at Hedgeye Potomac Research, to Reuters. “Everybody thinks he could easily support NOPEC.”

But even if the bill passes, which most commentators say is unlikely, OPEC won’t die. With Russia now involved, the infamous oil cartel may create more headaches for the US than ever before.

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