As long as there is oil… there will be OPEC!

(But what power could the cartel have in the future?)

09:00 | 9 февруари 2024
Обновен: 22:23 | 10 февруари 2024
Снимка: Bloomberg LP
Снимка: Bloomberg LP

By Roselina Petkova

Necessary for the development of the economy, oil has long been more than just a raw material. It is a political weapon. And the producing countries are not afraid to use it.

One of the daily news we follow at Bloomberg is the oil trade. It is a well-known fact that there is no exact price for the raw material. There are dozens of grades of crude oil, but financial markets strictly follow two: Brent and West Texas Intermediate (WTI), the grades traded in London and New York, respectively.

Since the collapse of the oil-fixed price system run by the Organization of the Petroleum Exporting Countries (OPEC) in the mid 80s, the markets have set the prices. The influence of OPEC is expressed in regulating the production, and precisely because of this, all of their decisions are monitored carefully by the financial world. Each abrupt change in the yield quotas signals the movement of the economy. At least that was the situation we were following. But recently analysts have noticed another trend.

The strong division in OPEC: The distancing of Saudi Arabia from the small producing countries; the increasing influence of the USA, not only as a major player in the oil market, but also as the economy from which the growth of oil production comes; and the fact that even if quotas are reduced, prices are not trending downward. All of this begs the question: Is OPEC's grip on oil markets weakening?

OPEC and how it all started

The year is 1960. After a several-day conference held in Baghdad, the Venezuelan politician and diplomat Juan Pablo Perez Alfonso told the media: “Now we are united. We are making history.” This marks the beginning of OPEC. Alfonso and his four colleagues from Saudi Arabia, Iraq, Iran and Kuwait became known as the founding fathers of OPEC.

The conference was convened by Iraq. And the Reuters news agency, covering the event in Baghdad, said its main purpose is to develop a unified policy towards the major oil companies which “recently decided to reduce crude oil prices.” In the same article, Saudi Arabia's Director General of Mineral Resources, Sheikh Abdullah al-Tariki, stated that the countries attending the conference own 90% of the world's oil reserves and can, if they reach a consensus, make the oil companies comply with the decisions at this conference.

Although Sheikh Abdullah al-Tariki is the first oil minister of Saudi Arabia and a co-founder of OPEC, the main architect of the organization is considered to be Juan Pablo Perez Alfonso. He was Venezuela's oil minister in the late 1950s and led efforts to create an international organization to unite oil-exporting countries.

Before the establishment of the organization, the oil markets were dominated by the production companies, which analysts say affects the behavior of the trade. There is also a possibility that without OPEC today, companies and countries would enter into a competition to extract the raw material, and according to financial analyst Preslav Raykov, this would be detrimental to any of them. In 1960, shortly before the "Baghdad Conference" was convened, the oil companies announced a sharp drop in the prices of the raw material.

It is this that accelerates the support of the idea of creating OPEC to be supported by the major producing countries. From the history of the organization is known that its creation by the five developing oil-producing countries occurred during a period of transition in the international economic and political landscape, which saw large-scale decolonization and the birth of many new independent states in the developing world.

“The international oil market was dominated by the multinational companies known as the “Seven sisters” and was largely separated from that of the former Soviet Union and other centrally planned economies," the organization's founding history added. In 1968 OPEC adopted the "Declaration on the Petroleum Policy of the Member States", which emphasized the inalienable right of all countries to exercise permanent sovereignty over their natural resources in the interest of their national development. By 1969 the number of members had grown to ten.

The embargo that cemented OPEC as a major factor

The organization’s control was consolidated during the world's first oil crisis in 1973. It was provoked by the Yom Kippur War, when Syria and Egypt attacked Israel by surprise, causing an inevitable spike in oil prices. The crisis deepened when the US helped Israel in the Operation Nickel Grass, and the Soviet Union responded by supplying arms to the two Arab countries. 10 days after the October 6 attack, OPEC decided to raise the price of oil with 70%. Libya cuts oil supplies to the US. Iran, which was then a world player in the trade of the raw material, tightened the supply to the whole world. And on October 20, OPEC decided to join the embargo. As a result of these actions, the oil price rose from $2,90 per barrel to $11,65 which affected the entire global financial system. It was the oil embargo of 1973 that imposed OPEC as a global organization, and the main consumer countries led by the USA realized the importance of this raw material and the need for global control.

The US as a factor in the oil markets

After 2015, the US gradually took the initiative and became the #1 producer of energy raw materials, which has enough leverage to influence the price of oil, while OPEC is increasingly obviously losing control of this segment. Simply because the shale revolution allowed the US to quickly bring solid quantities of the commodity to market within 3 to 6 months. While OPEC did not have such an adequate control tool, explains Preslav Raykov. But he adds that the shale era in the US did not manage to completely weaken the influence of OPEC, and despite several years of weakening of its control, the organization managed to gain an upper hand in control and strengthen its grip on the oil markets.

But it is the US presence on the oil map that has some analysts questioning OPEC’s power in the future. In 2017, Saudi Arabia and Russia were bigger producers than the US, but today that is no longer the case. “This takes away from the power of OPEC+”, says in the Business Start show Dimitar Georgiev, head of “Financial Markets” at ELANA Trading. According to him, OPEC will not disintegrate, but the strength of the organization will be lost. He explained that before there was also a price war for several years where, with lower oil prices, OPEC tried to push out US shale gas and oil producers, and that happened partially.

In fact, the big winner right now from OPEC production cuts is the US, which has steadily increased its share due to its efficient production and shale technology. "At the moment, America produces 50% more oil than Saudi Arabia and Russia," explains Georgiev. According to Preslav Raykov, OPEC countries currently have an advantage in trade. "It is not about competition, but a method of controlling the market. The shale revolution and the shale sector is much faster in getting new quantities out, developing new oil wells and starting production,” he explains.

Although shale industry is really flexible and fast, the main supply of oil still comes from OPEC countries, believes Raykov. He points to the fact that the shale revolution and sector have corrected in recent years. “Many of the participants went bankrupt, large holdings bought them and switched to another mode of operation – economically efficient and technologically cleaner," says Raykov. The US goal is not to cause OPEC to collapse in order to capture its markets, but rather to influence OPEC policies more effectively.

The division in OPEC

The dynamically developing global situation makes us wonder if OPEC will continue to control the oil markets. Analysts do not question the existence of the organization. The question is whether the division in OPEC itself will not affect the authority and strength of the organization. During the Covid pandemic, Russia temporarily joined the format and OPEC+ was created.

At the moment, because of the sanctions, Russia is unofficially extracting huge amounts of oil, and this undermines all decisions by OPEC to reduce quotas and adjust targets. Preslav Rakov says that at the last meeting, the representatives of Saudi Arabia were worried and nervous precisely because it is not possible to effectively influence oil prices despite the restrictions on production, which it promotes and implements effectively. Angola, which left OPEC and now has 12 member countries, also signaled the unfavorable sentiments in the organization. The decision did not come as a big surprise because the African country was opposed to the reduction in production imposed by the leader Saudi Arabia. But analysts see serious cracks in the oil cartel that are poised to deepen in the coming months. Angola is one of the big players from Africa, currently producing 1.1 million barrels per day. Analysts question whether it would even be able to increase production outside of OPEC.
Angola is not the first country to leave OPEC – Ecuador, Indonesia and Qatar did so before it. And now the cartel is trying to woo Brazil, which after years of refusal has finally signaled that it will join but will not participate in the mining quotas. The other expectation is that Russia will remain in the organization and the OPEC+ format will become permanent.

The future of OPEC

As long as we continue to live in the oil age, the future of OPEC is not questioned. What form will the organization take or how long its decision will continue to control the oil markets remains to be seen. The world is in the transition to clean and green energy. But at this stage, 85% of our energy needs are met by fossil fuels, including oil and gas. Rather, the organization has to adapt and optimize its production processes. The lack of investments in the conventional mining puts the energy system under risk. But at this stage, there is no prospect of OPEC not being a factor in the market, despite opinions that its existence violates all principles of free trade.