• Bryan

Is OPEC Becoming Irrelevant?

Updated: Jul 2, 2019

So OPEC roll into town like a bunch enforcers and self-appointed regulators to try and shore up the crude oil market. 

At the Vienna meeting on Monday and Tuesday, it is expected that the cartel will continue with the production cuts initiated in December 2018 along with Russia and 10 other non OPEC producers, to take 1.2 million barrels a day off the market.

Oil prices really should be regulated by supply and demand and not by OPEC. How far does OPEC want to push up the price? And is it even going to work? 

The previous cut in production has had limited impact. Global changes and geopolitical tensions mean that this extension in in the cut in production is unlikely to work in the long run for a number of reasons.

Waning OPEC clout

OPEC is no longer the cartel that it used to be when it was able to use its dominant position to try and influence oil price as well as global events, as it did back in 1973. 

Then OPEC was able to put the squeeze on the US economy as well as on other Western countries that Arab OPEC members accused of supporting Israel during the Yom Kippur War.

Following the oil crises, Western countries established the International Energy Agency, which mandated members to set up strategic petroleum reserves. 

Today there are over 4 billion barrels in the global strategic reserves, and in the event of an oil crises, the reserves ensure the availability of oil for about 90 days. The US  for instance, has its strategic reserves in four deep underground storage sites in Texas and Louisiana.

Any major disruption to oil supply for the US and other Western nations including Japan will lead to the release of strategic oil supplies, which is not in the interest of OPEC. Production capacity

Today the largest oil producer in the world is the US, which is not a member of OPEC nor does it participate in any coordinated action with OPEC to shore up oil prices.

This poses a major headache for OPEC because what happens when OPEC cuts production is that it creates extra capacity for US shale oil producers. 

With President Trump determined to keep domestic oil price in the US as low as possible, any cuts in production by OPEC cuts is an even greater incentive for US producers to pump more.

Cheating by OPEC members

Analysts point to cheating by cartel members, who generally start off sticking to production quotas, until prices start to rise. At this stage members naturally start acting on the basis of self interest and pumping more oil in order to maximize revenues.

The self serving behaviour by individual OPEC countries is known as game theory, and when it gets to this point, compliance therefore goes out the window.

Geopolitical tensions

Iran - a member of OPEC is currently in desperate straits, given the crippling sanctions imposed by the US. The regime in Iran is determined to find ways circumvent US sanctions and sell its oil. 

Therefore, as Iran continues to attend OPEC meetings, the tough economic situation means that in reality the regime is unlikely to abide by any quota, and could potentially flood the black market with oil in order to keep its economy afloat.