The oil world is waiting with bated breath to learn what, exactly, OPEC and its partners in production curbs will decide at their meeting in Vienna this week. The oil-producing cartel is giving everyone a run for their money, with final decisions delayed because of internal disagreements.
The future of oil prices hangs in the air, and OPEC is once again calling the shots.
A few years ago—in 2014, to be precise—the Financial Times published an opinion piece by Nawaf Obaid, a fellow and associate instructor at the Belfer Center at Harvard’s Kennedy School of Government, who pointed to Saudi Arabia’s decision to keep pumping oil despite falling prices as an example of why OPEC was becoming irrelevant. The Saudis showed their fellow OPEC members that the market, and not a producers’ group, should dictate where prices should go.
Of course, we all know how that attempt to let the market dictate prices didn’t end well for Saudi Arabia or its fellow OPEC members. Actually, Saudi Arabia’s 2014 attempt to let the market “rule” as Obaid put it, created the foundation for the next round of claims of irrelevance for OPEC.
The 2014 oil price crash targeted Saudi Arabia’s—and OPEC’s—biggest rival at the time, U.S. shale. Shale producers were supposed to die under the weight of low oil prices and high debt burdens. While many did go under, many others survived and became leaner and meaner, and better prepared to withstand any future crises.
Three years later, U.S. shale was thriving, the country was on its way to becoming the world’s largest oil and gas producer, which it achieved in 2019, and OPEC was, once again, becoming increasingly irrelevant, according to various commentators and analysts.
There was more than one reason for these claims of irrelevance. In addition to the rise of U.S. shale, along with other non-OPEC producers such as Brazil, for example, Europe spearheaded what we all now know as the energy transition. In this transition, any oil producer (not just OPEC) would lose its relevance as the world weans itself off oil. That was the plan. It still is the plan; but it appears this will take a lot longer to pan out than previously expected.
The pandemic was the wild card nobody could have expected, and it was the pandemic that led to OPEC returning to relevance with a vengeance only to prove it had never actually become irrelevant.
When prices tanked in the soaring of last year, with WTI even sliding below zero for the first time ever, all eyes were on OPEC, the “increasingly irrelevant” oil cartel to do something about it. And OPEC, this time bigger with Russia and nine other producers, delivered. The extended cartel agreed to cut a massive 7.7 million bpd in combined production in order to arrest the inexorable slide in oil prices caused by the pandemic.
Now, a year later, OPEC continues to be the single most important factor driving oil prices, while U.S. shale drillers, the great challengers, keep their priorities in check, focusing on returning cash to shareholders than on boosting production even with prices at the highest in three years.
OPEC+ members produce as much as 45 percent of the world’s oil. OPEC on its own produces around 40 percent. The sheer size of that number is enough evidence that OPEC could never become irrelevant unless its members quarrel, which has happened before raising suspicions of a looming breakdown. Yet OPEC seems to survive every one of its internal rifts, whether they are between sworn enemies such as Saudi Arabia and Iran or, as in this meeting, the UAE and the rest.
Early reports from Vienna this week suggested there is already a preliminary agreement among OPEC+ members to gradually return 2 million bpd to global production between August and December. This would be less than most observers expected but the news still drove oil prices higher simply because it provided some clarity on the future balance between supply and demand.
Uncertainty brought about by the pandemic last year wreaked havoc on virtually every industry with the exception of online retail. To say that the coronavirus took the world by storm would not be an exaggeration. Yet in oil, the industry was lucky to have a cartel that accounted for enough of global production that if it agreed to curb this production, it would relieve the global supply excess.
This is perhaps the biggest reason why OPEC is and will continue to be relevant until the world runs on oil.
The cartel, for all its faults—such as the very fact it is an oil cartel—provides much needed certainty in times of excessive uncertainty everywhere else.
While U.S. shale drillers are private companies whose top priority is the interest of their own shareholders, OPEC+ is made up of state-owned companies. It is the states that dictate what the companies do, not the market. Ironically, this version of central planning appears to be of benefit for more than just the planners.