It is hard to tell if the Organization of Petroleum Exporting Countries is still alive; or relevant, because the once-feared entity seems to have no power over the price of oil.
OPEC’s members have not even been able to agree on the levels of oil output. Freezes on output were once OPEC’s most potent weapon, back in the 1970s they almost brought the United States to its knees. Today, the world basically ignores OPEC and it is easy to see why.
A barrel of oil was trading at $48.99 (€43.97) in the United States on July 2, 2016, Reuters reported. That price was the highest in three months, although it was still less than Brent Crude futures which rose to $50.40 (€45.23) a barrel.
The OPEC nations’ response to that low price was to raise production to 32.82 million barrels of oil a day, Reuters reported. That defies the logic of basic economics; which teaches us that increased supply leads to lower prices. Yet OPEC is ignoring that logic and cranking up the pump.
Low Prices Doom OPEC
Most of the major OPEC nations including Saudi Arabia, the United Arab Emirates and Iran, increased exports according to Reuters. The reason for the increased exports was to generate more income. It looks as if the only way the big oil exporters can make money by increasing volume.
That dooms OPEC’s reason for existence to keep prices high and money flowing into the oil producing nations. At least some oil producers including Saudi Arabia have made the calculation that the only way they can survive is to keep prices low.
Another reason for low oil prices is to discourage energy efficiency and alternatives such as electric cars. Companies such as Tesla, Ford and Volkswagen are marketing or preparing to market electric vehicles; with levels of performance that rival and sometimes exceed those of gasoline and diesel powered cars.
Is Saudi Arabia trying to kill OPEC?
Strangely enough the biggest threat to OPEC’s future is its most prominent member: Saudi Arabia. The man in charge of the kingdom’s economy; Deputy Crown Prince Mohammad bin Salman, has made the decision to forcibly wean the nation off of oil.
Mohammad hopes to accomplish that goal by increasing oil exports; and reinvesting the money generating in the Saudi economy. Part of the plan seems to be to sell as much as oil as possible; in order to generate the maximum amount of cash.
One reason for this is that Mohammad might believe that the demand for oil; and potential profits from it, will soon fall. There is some evidence to justify that thinking two major economic powers; Germany and India, have long term plans to switch to electric cars. Norway’s political parties have a plan to make all new cars in that nation run on electricity by 2025.
Another motivation might be that selling off large amounts of oil is at any price is the only way Saudi Arabia can survive. The nation nearly became insolvent in spring 2015, prompting major budget cuts, Bloomberg reported.
Outside Pressure on OPEC
The final pressure OPEC faces is the rise of major oil producers outside of its influence including Russia, Canada and the United States.
The USA is now the world’s largest oil producer pumping 13.7 million barrels a day, CNN Money reported. That hurts OPEC by reducing American demand for its product, and enabling the US to export oil. Since American oil exporters are not guided by national policy they have no incentive to keep prices high.
The number two oil producer is Saudi Arabia, which pumps around 11.9 million barrels a day; that’s a major problem for OPEC because the kingdom is now in the oil discounting business. That means it sells at the lowest price possible; in order to ensure volume and a large cash flow. The number three oil producer Russia; follows a similar market strategy with the 11 million barrels a day it pumps.
All this means that it is no longer possible for OPEC to control the world’s oil market. The organization lacks the means to control the price of oil which makes it irrelevant.
OPEC is not dead but it might as well be, because it has no real influence even over its own members. Since it cannot control the price of oil, OPEC is now irrelevant and should be ignored.