Why OPEC is Still Mighty

After the dramatically decreases in the crude oil prices during the second half of 2014 which continuously dropped to below $30 per barrel in 2016 January, most of observers claimed that the time for the Organization of the Petroleum Exporting Countries (OPEC)’s influences was over. They relied on essential market factors such as stronger U.S. Dollar, shale oil revolution in the United States which was backed by large investments and technological breakthroughs, as well as weakened global economical growth and historical highs of OECD oil inventories.

Meanwhile, the OPEC members and OIC’s losses were estimated to more than $1 trillion during just 15 months until 2016 November, since the crude oil prices’ fall in 2014.

OPEC’s Mission and Power

While OPEC’s mission is “to coordinate and unify the petroleum policies of its Member Countries and 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”, divergence of OPEC members seemed as last shot against it.

Beside, the OPEC members control more than 70% of world proved oil reserves (1,220 out of 1,706 billion barrels of oil, in 2016) as well as produce about 42% of world total oil production what they employed to satisfy their mission, historically. Actually, OPEC has stabilized the market by changes in its total production, mostly by pumping higher rate of product which enable it to increase its share in the market, but sometimes OPEC decreases the production rate to secure the oil price.

Regardless of defining OPEC as a cartel or an organization, they could respect their mission and total expedient, even where the conflict of their interest was a matter. Absolutely, some producers in the OPEC with the ability to change their production level fast and widely, especially Saudi Arabia, act in not too dissimilar a way from a commodity producers but which is driving the OPEC’s actions historically, is consensus not veto by most powerful members.

Indeed, the main oil customers tried consistently to threaten OPEC’s control on international oil market, especially after 1970s when embargo by some OPEC’s Arabic members triggered the oil prices. Although, their focuses on new energy sources such as Hydro, Nuclear, Wind or Solar, increased the share of them to 13% of the world energy sources in 2016 but OPEC taunted them by its last affects on the oil market.

OPEC’s Influences in Oil Market

For the first time, OPEC flexed it’s power against global oil price in 1973, when hiked it up to $12 per barrel, the highest price until then. The next major, was at March 1998 and March 1999, when OPEC cuts its production level twice during a year to end the slide in oil prices. All of OPEC members cuts their production in a high level of cohesiveness to verify their approach to a common object.

The third considerable OPEC’s effect was successfully implemented in the high oil price environment of 2004 to cutback the oil prices. OPEC’s production in 2004 was raised by 2.1 mb/day comparing with 2003 to cool overheated prices.

Finally, in 2016 November, when the continuous fall in the oil prices raised budget deficit of OPEC members, they decreased their products level in cooperation with some Non-OPEC producers to balance the oil market again. The agreement which was doubted to be respected by all the parties but successfully stabilized the market as addressed in the OPEC’s objectives.

While most of observers and analysts believed OPEC’s control on oil market was gone and predicted its end, OPEC members’ loyalty to their common mission could make a new alliance including even some oil suppliers out of the OPEC which empowered them to lead the international oil market again which is the fundamental of recent raises in oil prices, even by threatens from shale oil and not significant improvements in the world growth rate…. It approved that OPEC is mighty yet but respecting their mission in future against the shale oil and new energy sources could interpret its fate.

Shahriar Sheikhlar
Shahriar Sheikhlar
Shahriar Sheikhlar is an independent energy security and strategic development analyst, in Erbil, Kurdistan Region of Iraq. Mr. Sheikhlar, holds postgraduate in Management, Strategy. He is giving advices and services to some local and international think tanks and news agencies.