Why OPEC Doesn’t Matter Anymore

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In September of 1960, representatives of the oil-rich nations of Iraq, Iran, Venezuela, Kuwait, and Saudi Arabia came together in Baghdad, Iraq and formed the Organization of Petroleum Exporting Countries (OPEC).

This was a huge power play from Middle Eastern countries and an attempt to have greater sovereignty over their own natural oil reserves and become a major player in the international economy.

A Brief History Of OPEC

The new group’s stated goal was to ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.”

Before OPEC’s founding, the world’s oil had been almost exclusively controlled by a group called the “seven sisters,” which was compromised of the largest oil companies at the time. OPEC wrested control from these international corporations and sought to have more control over their resources. This was a huge step forward for the member nations.

Membership in OPEC grew quickly and today it has 13 member nations. Throughout history, they have played a prominent role in the international oil market and the world economy in general. At the height of its power, OPEC nearly brought the United States economy to its knees.

1973, The Yom Kippur War And OPEC’s Reaction

Image Source: Foreign Affairs

In 1973, the U.S. supported Israel in the Yom Kippur War and various other Arab-Israeli conflicts. In response, OPEC raised oil prices from three dollars a barrel to twelve dollars a barrel. OPEC raises prices by setting quotas that restrict the production of oil in member states when the demand is high. It plays the market to inflict economic hardship on oil consumers.

The 1973 price hike led to gas shortages and rationing in the U.S. and other Western nations. This caused serious political problems for Western leaders and forever cemented OPEC’s status as boogeyman to the people of the West.

Although OPEC reached its apex in the 1970s, its power and influence have been falling precipitously ever since despite a few instances in which they could still have a profound impact on the oil market – see the aftermath of September 11th and the Iraq War. 

Why Has OPEC Lost So Much Of Its Power In Recent Years?

Let’s take a look at a few contributing factors.

1. Saudi Arabia v. Iran

Image Source: Business Insider

Saudi Arabia and Iran do not care for each other. In fact, they are hated rivals and the two most powerful nations in the Middle East. The two countries have done battle at nearly every OPEC meeting in recent memory, and the situation seems to be getting worse.

Since oil prices dropped in 2014, Saudi Arabia has done everything in its power to prevent other OPEC nations from producing too much oil that will hypothetically drive the prices even lower.

Other member nations that are not as financially secure have been pushing them to raise the quotas so that they can bring much needed revenue into their countries. Chief among the nations pushing for higher production is Iran.

The lifting of U.S. sanctions on Iran has created a number of new buyers for Iranian oil, and they desperately need the revenue after being subjected to crippling sanctions for many years. The Saudis will not budge however, and strongly oppose lifting quotas that they know will make their chief rival in the region an economic powerhouse.

Iran seems intent on defying Saudi Arabia and increasing its production without their approval. In June 2015, Iran’s oil minister Bijan Zanganeh claimed that Iran would pump an addition one million barrels per day, defying OPEC’s quotas.

This type of infighting completely undermines OPEC’s power. If the group cannot operate on a unified front, then they lose all control of the market price of oil which is their only claim to power.

2. Venezuela v. Saudi Arabia

Image Source: Oil Venezuela

Venezuela currently holds approximately 18 percent of OPEC’s oil reserves. That is more than any other member nation. Venezuela isn’t in a very good position to capitalize on that, however, as they are in a severely dysfunctional economic situation and the country is descending into chaos. With oil prices at six-year lows, the situation is becoming even direr.

They have repeatedly called on Saudi Arabia to enact changes that will raise oil prices by approximately 30 dollars a barrel, but the Saudis have refused. This has put Venezuela in a terrible position and further ruined its economy. There are some signs that when the Venezuelan economy ultimately fails, it will bring OPEC and the global oil market down with it. Energy economist, Phil Verleger calls Venezuela the weakest link in the oil supply chain.”

Its foreign exchange reserves hit a 12-year low of $15.3 billion and the nation is drowning in foreign debt that is due now. Venezuela has suffered rolling blackouts, looting, and food shortages. Much like Iran, it needs higher prices for oil now to save its economy and protect the political status quo. Venezuelan elections are scheduled for this month and if there is a drastic change in leadership, OPEC future could be very much in doubt.

Saudi Arabia seems oblivious to the entire situation. They continue to flood the Asian markets with cheap oil. The Saudis can produce the more oil in less time than any other member state and are largely operating without any adherence to the rules that govern other members of the group.

This has led to a deep sense of distrust between the Saudis and the less wealthy members that has the potential to tear the group apart.

3. OPEC Is Rapidly Losing Its Market Share

Image Source: Commentator

Oil prices reached an all-time high during the 2008 recession. The cost of a barrel of oil reached nearly $99 in 2008 at the lowest point of the recession and consumers in the West felt the effect in their personal finances. They were paying an obscene amount of money for a gallon of gas and the U.S. government in particular felt pressure to do something about the crisis.

The high oil prices made it economical for U.S. oil companies to do something that was once economically unthinkable – large-scale hydraulic fracturing, or fracking. This once costly process became economical in the face of the astronomically high price of the oil coming from the Middle East. In 2008, the United States oil industry was producing 5.5 million barrels of oil per day, but with fracking, that number rose to 7.4 million in 2013.

The increased oil production allowed the U.S. to drastically reduce the amount of oil it imported from OPEC countries and nearly ruined many of those nation’s economies. Most experts thought that OPEC would cut production in an attempt to raise prices, but its de facto leader, Saudi Arabia refused despite pleas from other members of the group.

Russian President Vladimir Putin believes that the Saudis are refusing to cut production to damage the Russian and Iranian economies. Although this is unsubstantiated, Saudi actions have inflicted hardships on the Russian and Iranian people.

The Slow Decay Of OPEC

Image Source: Novosti Energy

The Saudis are one of the only nations in OPEC that can withstand this economic climate due to their vast reserves of treasure and their intimate diplomatic relationship with the U.S. It is possible that they are engaging in economic warfare to take out their rivals and consolidate power in the region.

The common theme here is that OPEC doesn’t matter anymore because very few members are following the group’s rules. Iran and Saudi Arabia are producing as much oil as they want without any regard for the quotas that once made OPEC such a powerful force in the global market.

OPEC was at its strongest when they presented a unified front. Tensions between Iran and the Saudis, and Venezuela’s economic collapse have made that nearly impossible. It’s likely that OPEC will continue to exist for the foreseeable future, but it’s unlikely that they will ever return to the powerful position they held on the world stage in the 1970s.

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