Is the Organization of the Petroleum-Exporting Countries (OPEC) still an influential player in the dynamics of the oil market? Since its creation in 1960, the organisation’s aim was to tackle the excessive power exerted by multinational oil companies in the market, negotiating all aspects of production, prices and oil concessions.
Crunching the Numbers
According to the International Energy Agency (IEA), OPEC member countries account for over 30% of the world’s crude oil production, having supplied the market with 32.25 million barrels per day in the last quarter of 2016 when the world oil demand amounted to 97.89 million barrels/day.
The OPEC share of the world crude oil reached a peak of 81% at the end of 2015, with the bulk of their reserves coming from the Middle East (65%).
These figures alone provide answers to those questioning the relevance of the group
The War Against the US Shale Industry
In 2014, due to an oversupply in the market caused by the rising success of the US oil fracking companies and the slowdown in China’s economic growth (one of the biggest oil consumers), oil prices started to decrease. Saudi Arabia (moving in the opposite direction to other OPEC members) decided to boost production and announced its decision at the OPEC conference in November.
After that, oil prices collapsed. Saudi’s move, having caused an oil glut, aimed to hurt US producers (especially fracking companies that needed a high oil price in order to sustain the high operative costs). The US oil production doubled compared to 2008 levels and, as it was approaching the volumes of Saudi Arabia, it seemed to threaten OPEC’s market share.
The effects on the market were devastating, with the oil prices reaching 26.55$/barrel and with a lot of US shale companies being forced into bankruptcy due to unsustainable costs. Others managed to reduce costs by up to 40% increasing efficiency and improving technology. They survived and came out stronger. And they have to thank OPEC from a certain perspective: in fact, these results would not seem feasible if oil prices had remained at the values seen before 2014.
Learning a Lesson
There is no question that OPEC has the power to influence prices through decisions related to the production: it is a natural consequence of its great market share. But if it is true that a lot of US firms collapsed after Saudi Arabia’s decision, overall US production seems to have suffered less.
Two years later, Saudis have to draw their conclusions: OPEC can still drive oil prices, and that is a fact. But it has no power against the technology advancement: once competitors learn how to deal with oil at 20$/barrel, the power of driving prices vanishes.
Times Have Changed
OPEC has to face a new reality: competition is tougher, and defending its market share will require bigger efforts in the future. Maybe these facts are at the base of the massive renewable-energy investment cycle planned by Saudi Energy Minister Khalid Al-Falih, that recently said OPEC’s biggest producer plans to generate close to 10 gigawatts from renewables (primarily solar and wind power).