The Failures of OPEC Explained – Introduction
Organization of Petroleum Exporting Countries (OPEC) was founded in 1960 in Iraq. The organization that is made up of the biggest oil exporting countries was created with the goal of ensuring price stability and a united voice on the world’s most important commodity. Almost 60 years after being founded, the organization has continued to spew failure after failure.
For example, in 1973, the organization placed an oil embargo on Western countries that supported Israel. This embargo meant that the countries could not export oil to these countries, which included the UK and the US. This led the price to more than double. While these countries were punished, it increased their resolve to independence.
Another failure happened less than ten years ago after the United States increased its investments in the hydraulic fracturing industry. In a meeting in Vienna, the countries decided to flood the market with crude oil. By doing this, they expected the companies doing the fracking to get out of business. This is because with the prices so low, the companies would not continue drilling. What they did not seem to understand was that the interest rates in the US were at historic lows. This made it possible for the countries to borrow heavily and invest in technology. This means that even with crude oil at historic lows, the companies were able to operate profitably.
When OPEC abandoned its oversupply of crude oil, it was a gift to American producers. These producers were able to increase production at higher oil prices which led to improved profitability. This year, the US has become the biggest oil producer in the world and last week, it became a net exporter for the first time. This means that the country exports more crude than it imports.
The improved role of the United States has changed the calculus in the oil industry. For one, it has led to a unity between OPEC and Russia in what is now known as OPEC+. Last week, the members met at the annual meeting that takes place in Vienna. This meeting was complicated from the start.
This is because two months ago, Saudi Arabia – the de facto leader – killed a dissident in Turkey. This exposed the country to retaliatory actions from the United States. The US supported the kingdom because he did not want the country to lose the military orders. It also did not want higher prices. It did not want to lose a key ally against Iran. Therefore, with this gift, it was impossible for Saudi to try to offend the president of the United States, one of its closest allies. On the other hand, Russia had bones to chew with the United States. This is because the US had canceled a meeting between Trump and Putin in Argentina after the recent clashes in Ukraine. Russia supported more production.
Regardless of all this, oil prices continued to decline because the proposed supply cuts will not move the middle. It is also a testament of the ongoing weakness of OPEC at a time when the world is faced with challenges. Amidst all these, the key beneficiaries will be the emerging market countries which make the biggest oil importers in the world.