It is remarkable how much has changed for the Organization of the Petroleum Exporting Countries (OPEC) over the past 12 months. It was not too long ago that the organization’s cuts or increases would move markets and hold prices in place for a time, but those days are gone.
Non-OPEC countries, like the U.S., are playing a more significant role, and the world has learned it can go elsewhere for its oil. OPEC’s influence is diminishing, and it’s hard to imagine how it will regain its past market power.
Just over a year ago, OPEC joined forces with Russia to cut production and stabilize prices. However, by mid-year, OPEC, with Russia’s buy-in, started to increase production — a move that was not borne out of strategy but rather desperation.
It came as the U.S. offered purchasing waivers to eight countries to buy Iranian crude and was followed by the U.S. decision to release supply from the Strategic Petroleum Reserve.
As of December, Russia and Saudi Arabia were both producing over 11 million barrels a day (mbd) with the U.S. topping 12 mbd. In an effort to alleviate a further cratering of oil prices, in Vienna, OPEC, Russia and other non-OPEC countries agreed to cut production in the new year. Despite this agreement, the price for Brent and West Texas Intermediate plunged, and there’s still room to fall further.
OPEC accounts for over one-third of global oil production, so it still exerts influence on the market and will continue to do so moving forward. However, it’s clear that OPEC is struggling in a new oil world.
While its meetings are watched and examined by analysts and its decisions do have a temporary impact on oil markets, what we’re seeing today tells us this won’t last long. OPEC’s cartel power is weakened by internal challenges and members who really can’t contribute to production increases or even decreases.
Part of the problem is OPEC’s composition. Saudi Arabia clearly sits at the top of the organization’s hierarchy. It produces the most of any member, which gives it the loudest voice and the biggest vote.
But laggards like Venezuela, Libya, Angola and Ecuador are producing less today than a year ago and can’t compete with non-OPEC countries that are producing more barrels.
The mix of failing states like Venezuela and Libya in the organization can’t be overlooked, and complicating matters further is the fact that Saudi Arabia and Iran are arch rivals. Neither trusts the other, so cooperation over production, when it happens, is usually highly contentious and any agreement is short-lived.
Then there’s Russia. Over the last decade, Russia has reemerged as one of the top three oil producers in the world. During the Soviet period in the late 1980s, the country was producing over 12 mbd, but by 1998, production had fallen to just over 6 mbd.
Today, its production is back up to Soviet levels, and the country is Saudi Arabia’s "plus-one" when it comes to oil. Saudi Arabia needs Russia and the compliance of other non-OPEC producers for OPEC decisions to have impact.
Another challenge OPEC faces is staying true to its strategic mission of stabilizing oil markets and prices through coordinating its members’ petroleum policies. This isn’t happening. Members’ policies are inchoate and are increasingly more about their specific country interests rather than the collective interest of the organization.
Take, for example, Qatar. The country’s exit from OPEC didn’t come as a surprise given its 18-month standoff with Saudi Arabia and its Arabian Gulf neighbors. It’s difficult to imagine how Qatar could stay connected to OPEC when three members support a blockade against it and have publicly tried to shame and blame it for financing terrorism.
Qatar, which was producing just over 600,000 mbd, wasn’t a significant oil producer for OPEC. However, its departure highlights the fractures in OPEC and the organization’s inability to use its collective power to act.
In November, Bloomberg reported an unpublished paper from the King Abdullah Petroleum Studies and Research Center looking at Saudi Arabia without OPEC. While the report was not commissioned by the government, it does raise an interesting question: Would Saudi Arabia be better off out of OPEC?
Saudi Arabia understands its new realities and recognizes the organization’s diminishing power. The tremendous and rapid growth in U.S. shale production and the strength of non-OPEC producers means the organization needs a new strategy — and fast — if it wants to remain relevant.
Imagining a world without OPEC or an OPEC without Saudi Arabia would have been unthinkable 10 years ago, but the passing of time and new realities now call for new thinking.
Carolyn Kissane is the academic director and a clinical professor of global affairs at the Center for Global Affairs at NYU School of Professional Studies. She is also a non-resident fellow at the Payne Institute for Earth Resources.