The era of OPEC is over.
The 54-year-old organisation still exists on paper, but it’s unclear whether it wields any influence as a cartel above and beyond the desires of one member: Saudi Arabia.
At Bank of America Merril Lynch’s 2015 Global Outlook Conference on Tuesday, the bank’s head of commodities, Francisco Blanch, said that “OPEC has really, in my opinion, dissolved as a cartel.”
Here’s what the BAML commodities research group wrote in a note at the end of November about the subject:
…the fact that the some members still have spare productive capacity while others are facing structural declines ahead following years of underinvestment and lack of capital may have further widened the gap in perspective between the various interest groups. Diverging geopolitical interests and ideological rivalries among some members may have done the rest.
The five original members of OPEC are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since forming in 1960, it has also added Qatar, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, and Angola. (Indonesia was in the group, but suspended its membership in 2009.)
Very few of these countries’ interests were served by the November OPEC decision not to rein in production and let the price of oil continue to drop.
- Iran is reportedly pleading with the Saudis to stabilise the price.
- Venezuela, which is basically funded by oil production, is so broke that parts of Caracas are having blackouts.
- Iraq is having to cut back its already-tight 2015 budget.
- Libya can’t get back on its feet (for this and many other reasons, honestly).
- There’s a huge threat of civil unrest in Nigeria during the upcoming national elections, heightened by falling oil prices.
Meanwhile, the Saudis are sitting back, letting prices fall, and trying to starve out American producers — because they can. That said, it does seem that smaller Gulf states like Kuwait and the UAE are on board with this plan.
At BAML earlier today, Blanch noted that in the long term, it benefits Saudi Arabia to attempt to reduce US production, particularly as the world moves toward emissions caps and more energy-efficient technologies. But long-term strategy is a luxury of those who can afford the losses.
Alan Beattie makes the point in the FT’s beyondbrics blog that the Gulf states tend to have a much lower fiscal breakeven price, meaning their budgets assume lower oil prices and volatility doesn’t necessarily affect how the country is run — contrasted with, say, Venezuela. (More on that here.) “Politically secure governments are generally better at managing oil wealth than are shakier regimes, and indeed continue to be stable because of it,” Beattie writes.
If oil prices remain at current levels, the world will find out just how true this is.