Crude Economics
What’s the Point of OPEC?

That’s the question on the minds of many of the cartel’s members, after OPEC’s semiannual meeting in Vienna ended without any agreement on how to coordinate efforts to drive oil prices back up. A barrel of crude goes for under $43 today, a far cry from the $110+ per barrel levels achieved 18 months ago. While in the past OPEC has acted to cut production in order to set a price floor to bearish markets, this time around Saudi Arabia has strong-armed its less productive fellow members into adopting a business-as-usual strategy, preferring to endure today’s low prices in order to compete with non-OPEC producers for market share.

But this approach hasn’t been well received by OPEC’s less wealthy member countries, many of which have publicly called for the cartel to curtail output. As the FT reports, the meeting did little to bridge the widening gap between Riyadh and the rest of the group:

After a marathon seven-hour session that ended in chaotic scenes outside the Opec secretariat in Vienna, the only agreement reached by the cartel members was to meet again in June. […]

“For the first time in many years Opec has failed to specify a production ceiling and has decided to wait on events in 2016 before making its next move,” said Neil Atkinson of Lloyd’s List Intelligence. “This is a holding decision.”

The cartel’s decision not to set any targets for output over the next six months reflects significant uncertainty over how much more oil Iran will be able to produce once Western sanctions are lifted, and how quickly. Iran’s oil minister said he “didn’t have any other expectation,” adding his hope that “at the next meeting we can reach agreement.” The president of Petroleos De Venezuela said his country is “really worried.”

OPEC’s smaller fish will have six more months to position themselves and trumpet their anxieties, but it’s clear that without Riyadh’s blessing, the cartel isn’t going to change its course. As Atkinson put it, OPEC has “formalised the decision taken a year ago to produce as much oil as necessary to preserve market share while leaving prices to the market place.”

With the Saudis no longer willing to act as the global swing producer, OPEC lacks the capacity to cut production back enough significantly to affect prices, which leads to the obvious question: What purpose does the cartel now serve? We’ll check back in in June, but for now OPEC has resigned itself to letting the market set prices, which means crude is going to stay on sale.

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