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The oil-importing world has long hoped that the Organization of Oil Exporting Countries — a union of countries often at odds with each other — will fall apart and usher in an era of free-market oil.
OPEC’s decision at its November meeting to maintain output at 30-million barrels per day has once again raised the age-old speculation that the 12-member group featuring Saudi Arabia, Iran, Venezuela and Iraq, among others, has become ineffective.
“With oil having to ‘balance itself’ going forward, OPEC has given up on its traditional role of keeping supply and demand in check,” said Francisco Blanch, commodity strategist at Bank of America Merrill Lynch in a report. “The cartel is now effectively dissolved.”
Hold the champagne. Since the 1970s the group’s recalcitrant members have lurched from one oil episode to the next and have a long tradition of holding acrimonious meetings that seem to be their last. Often those meetings have not yielded the desired results, either.
The dysfunctional group has survived bloody wars between member countries (Iraq and Iran; Iraq and Kuwait), overcome US$9 per barrel oil in the late 1990s, and managed to hold regular meetings even as Saudi Arabia and Iran engage in proxy wars for regional influence.
Saudi Arabia’s latest feat of muzzling dissent from Iran and Venezuela in November is also nothing new, as Riyadh has long held sway over the group with the help of allies protecting its interest against a cabal of other member countries.
But it’s also true that the recent US$50 drop in Brent crude prices from its summer high is uncomfortable for most OPEC producers. With the exception of Kuwait and Qatar, OPEC producers will not be able to balance their budgets next year if Brent crude stays at today’s price of US$65.
But other producers would struggle even more. HSBC expects “lower prices to squeeze U.S. capital spending hard, given the magnitude of outstanding debt in the sector.”
OPEC’s proceeds from oil exports will no doubt be affected, but the group will still rake in revenues of $760-billion this year alone, to add to the trillions of dollars already parked in sovereign wealth funds and global assets, and giving it the fiscal cushion to ride out the oil decline.
It appears that instead of being dissolved, OPEC remains a potent force in global markets.
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