OPEC may control oil prices for at least 20 more years

Introduction

Earlier this month, OPEC-Plus (OPEC and Russia) made a unanimous decision to cut oil production in a bid to stabilize the oil markets. To quote OPEC, “There was a consensus to slacken crude oil production by 3.7% of global demand, which helped push up prices by $5 per barrel to over $85 per barrel. 

Major OPEC members like Saudi Arabia cited production cuts of 1.66 million bpd over and above the existing 2 million bpd cuts as being precautionary measures. Basically, OPEC is wary of recession due to the banking crisis and the price cap on Russian oil catalyzing major oil market shifts. 

While everyone was speculating on a softening of OPEC’s grip in the oil market considering the shale gas revolution, the rise in oil prices following their decision to slacken output has proven otherwise. This has led many to believe that OPEC’s hold and influence in the oil market are not going to be diminishing any time soon. 

Why did the production cut trigger a price spike?

OPEC was formed as a 13-country alliance in Baghdad in 1960 to ensure that crude is traded at a fair and stable price for producers. It also ensures that consumers receive efficient economic supplies of crude oil. In 2016, 10 more member countries joined into an informal alliance called the OPEC-Plus. The big participant in OPEC-Plus is Russia, but others like Mexico and Kazakhstan were also part of it. This was a reward for Russia having supported oil prices following the sharp oil price crash between 2014-2016. Today, the OPEC-Plus produces 40% of global crude, with a 60% share in international trade. 

Such colossal numbers should already tell the story of what could happen if the organization suddenly decided to alter its volumes of production. In the present situation, their decision to cut production led to a substantial price increase because of the large market share of the group influencing global prices. Also, Russia is already bound by price caps due to sanctions.

OPEC-Plus and Geopolitics

This is not the first time that production cuts have had a strong impact on oil prices with larger macro consequences. In the early 1970s, the Arab members of OPEC had imposed oil embargoes on the US for supporting Israel during the Yom Kippur War. That created the “First Oil Shock” that resulted in oil prices surging 4-fold in just 3 months. Lately, the Russian attack on Ukraine has had a significant impact on the oil market, with EU and American sanctions on Russian oil having plunged Russian crude prices. However, neutral countries like India and China continue to purchase Russian oil without sanctions.

The OPEC-Plus decision to cut production, while seemingly economical, has been viewed by the Americans as facilitating Russian oil revenues, given that Russia re-joined OPEC-Plus following the war. That defeats the purpose of sanctions, which was to starve Russia of oil profits.

Where does OPEC go from here?

OPEC-Plus is substantially more influential than OPEC. The organization’s grasp over oil prices is likely to persist as long as oil demand keeps rising, and renewable technology is not fully developed to leverage the paradigm away from fossil fuels. This shift in paradigm is estimated to take at least 15-20 years. For now, we are not even calculating the resistance to a rapid shift to renewables, but that is a different story altogether!

Source: Media reports