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Crude Economics
“OPEC is Dead”

That statement was uttered by an OPEC official during its meeting in Vienna this week, by a delegate that, according to Reuters, sources represented a non-Gulf Arab member. And it doesn’t just seem to sum up the cartel’s frustrations on its inability to affect oil prices. It very well might be true. Reuters reports:

[E]vents at Monday’s meeting of OPEC governors suggest that if Saudi Arabia gets its way, then one of the group’s central strategies – of managing global oil prices by regulating supply – will indeed go to the grave. In a major shift in thinking, Riyadh now believes that targetting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend, according to sources familiar with its views. […]

Saudi governor Mohammed al-Madi said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so, sources say.

“OPEC should recognise the fact that the market has gone through a structural change, as is evident by the market becoming more competitive rather than monopolistic,” al-Madi told his counterparts inside the meeting, according to sources familiar with the discussions. “The market has evolved since the 2010-2014 period of high prices and the challenge for OPEC now, as well as for non-OPEC (producers), is to come to grips with recent market developments,” al-Madi said, according to the sources.

When we’re talking about OPEC, the only member that really matters is Saudi Arabia. Of the 32.25 million barrels of oil per day (mbpd) that OPEC produced in April, the Saudis contributed 10.12 mbpd, more than double the next most productive member (Iraq). Riyadh is the only member capable of realistically reigning back its output enough to affect the market, and historically has seemed willing to do most of the heavy lifting for the cartel in times of low prices.

Times have changed, though, and the country’s new man-behind-the-throne—the 31 year old deputy crown prince Mohammed bin Salman—has little interest in ceding Saudi market share in pursuit of higher prices while the rest of OPEC gets a free ride. This shift in thinking has been motivated in no small part by burgeoning non-OPEC supplies, upstart American shale production chief among them, which have threatened to dilute the effect of an OPEC production cut (as oil prices creep up, so too will U.S. output as more shale plays once again become profitable).

The global oil market is no longer dominated by a psychology of scarcity, but rather one of abundance. A sizable glut led to the price collapse we’ve witnessed these past 23 months, and it persists even with prices hovering (and perhaps finding a new equilibrium) near $45 per barrel, $70 cheaper than where they were in June of 2014. In this new world, the threat of OPEC dialing back its prodigious share of the world’s total crude supplies no longer seems as serious.

Famed oil guru Daniel Yergin declared last month that “[t]he era of Opec as a decisive force in the world economy is over,” and it seems as if OPEC’s members are slowly, begrudgingly starting to come to the same realization.

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  • Frank Natoli

    The global oil market is no longer dominated by a psychology of scarcity, but rather one of abundance.
    Just for the record, the reason the scarcity first occurred, in the 1970s, was because U.S. domestic production was naturally, i.e., without federal interference, dropping and OPEC achieved global control of supply.
    But the reason the scarcity continued for FOUR DECADES is because U.S. environmental extremists successfully blocked drilling offshore Pacific, offshore Atlantic, ANWR and post-BP spill Gulf of Mexico.
    And the reason the abundance occurred is because U.S. environmental extremists could not strangle hydraulic fracturing on private land.
    In terms of cause and effect, U.S. environmental extremists worked hand-in-hand with OPEC, for all these decades, forcing U.S. consumers to pay TRILLIONS of dollars in inflated carbon fuel costs that otherwise could have been spent on internal U.S. industry.
    And still ANWR and coastal waters are blocked.

    • JR

      I don’t mind paying up a bit at the pump to not have drilling in the coastal waters just yet. But i agree with your larger point.

      • Frank Natoli

        “A bit at the pump” is one thing. How about back to $4/gallon? How about $5? I am fortunate in having good work with good pay and can afford that. But a lot of Americans cannot, and it was NOT a coincidence that the sub-prime bubble burst in 2008 simultaneous with $4/gallon gasoline. A lot of people with such mortgages had a choice between filling the tank to get to work and paying the mortgage. They couldn’t afford both. That’s a “regrettable” aspect of policies intended to reduce all risk and all effect of man on the environment to zero. It is the Americans least able to pay who get hurt the worst.

      • texasjimbo

        Which entirely misses the point: just because you’re willing to do so doesn’t mean every body is, or even a majority are.

    • Y.K.

      “And the reason the abundance occurred is because U.S. environmental extremists could not strangle hydraulic fracturing on private land.”

      Funny that you mention that:

      http://thinkprogress.org/climate/2016/05/05/3775544/environmentalists-sue-epa-for-drilling-waste/

      “A coalition of environmental organizations is suing the Environmental Protection Agency, claiming federal regulators have for three decades failed to update rules for disposing of fracking and drilling wastes that may threaten public health and the environment.

      The lawsuit, filed Wednesday in the U.S. District Court for the District of Columbia, asks the court to set deadlines for the EPA to update its disposal rules.”

  • Andrew Allison

    OPEC died the moment that the Saudis decided to stop giving up market share for the benefit of the other members.

    • ljgude

      I don’t know if it would have worked but the Saudis might have tried using their capacity to overproduce and so gain market share at lower prices if other OPEC members tried to freeload. Holding the biggest reserves should be able to be played both ways. So they could have said last week, cut production proportional to us or we take the price to $10. I don’t think the structure has changed enough to prevent that play.

      • Andrew Allison

        They’ve been saying since the beginning of the oversupply that they will maintain market share and only cut production proportionally with the other members of OPEC. The only reason I can think of, other than hurting Iran, is that they see the oversupply lasting long enough that it would be very difficult to regain market share if and when it ends.

        • ljgude

          Yes, I agree there must be considerations like that in their calculus and that they don’t believe they really have the power to force the issue or they would have done so.

  • Proud Skeptic

    Nothing s forever.

    • Frank Natoli

      That’s philosophy not science or engineering.

      • Proud Skeptic

        Seems perfectly appropriate in this context.
        BTW- You may not have understood my comment. OPEC thought it would last forever. Nothing lasts forever.

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