OPEC Is Now Irrelevant

Asad Dossani

A few weeks ago, it seemed like crude oil had finally bottomed. After years of indecision, OPEC looked ready to act. Ready to cut production to stabilise oil prices. Until now, OPEC had been pumping crude oil at record rates. Their goal was to drive down prices and drive out higher cost US producers.

But now, prospects for an OPEC deal have weakened. Oil prices continue to fall. The cartel's inability to stabilise prices come as no surprise. Here's why:

First, their share of global oil production is declining. In the 1970s, the cartel accounted for over half of global crude oil production. In recent years, that number has fluctuated between 30-40%. Today, the US produces more oil than Saudi Arabia.

Second, political factors limit cooperation. Iran wants to increase production as it rejoins the world market. Iraq wants an exemption as it rebuilds its country. Everyone wants Saudi Arabia to shoulder the burden of oil production cuts. But the Saudis themselves are suffering from lower oil revenues. In fact, they recently issued bonds worth $17.5 billion to shore up their finances.

Third, doing so would hurt themselves. Producers like the US and Russia could easily fill the production gap. Prices wouldn't end up rising. OPEC would be worse off.

What does this mean for crude oil prices? The supply picture puts an upper limit on how high prices can go. If prices were to go up due to OPEC or other factors, new supply would come onto the market. We won't see $100 crude oil anytime soon. A few years ago, $100 for a barrel of oil seemed cheap!

We are witnessing the slow decline of OPEC. Their market power has diminished. Their ability to impact prices is limited. Soon, OPEC will fade into the history books.

For oil importing countries, this is great news. Over the last few years, India's budget deficit has fallen considerably. Mostly due to a lower oil import bill.

For oil exporting countries, this is an adjustment. An adjustment to a market where suppliers compete. A market without fixed production targets. A market where supply is plentiful and prices are low.

Is there a downside to this? Maybe. Higher crude oil consumption would reduce energy from renewable and less polluting sources. But that's a story for another time. Meanwhile, say goodbye to OPEC.

How long before OPEC breaks up? Let us know in the club. or share your comments here.

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2 Responses to "OPEC Is Now Irrelevant"
MICHAEL X GOMEZ
04 Nov, 2016
Every Kingdom - from the Romans to the Moghuls had to fade away. OPEC's days are also numbered. Why they could'nt step in & take in the fleeing Syrians & Iraqi's beats me - They have the land & they have (or should I say, HAD) the funds. And they sure talk of Brotherhood. All talk & no action, sure makes Jack a dull boy Like 
Nagesh Kini
04 Nov, 2016
Yes. The foundation for the formation of OPEC was laid by the America by its then foreign Mr. Henry Kissinger the great mastermind. After the debacle in Vietnam war in 1970s, American economy was in shambles. America was largest consumer and importer of oil. It had a large reserves of oil unexploited. He instigated the Arabian oil producing countries to nationalise the production of their oils companies to get more price for oil and to get rich easily. This ploy worked very well for both. Controlled production created demand over supply which in turn raised the oil prises. World's economy got a greater blow by this action. Today geopolitical scenario has changed with the division of erstwhile USSR into several small nations, Iran, Iraq, Kuwait suffered because of wars. Naturally every oil producing countries revive their economy by selling oil as fast as possible. Thus OPEC's relevance has come to an end. Still America is ruling the roost. Like (1)
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