THE BLOG

The Demise of OPEC Is Not Imminent

24/12/2014 04:32 GMT | Updated 22/02/2015 10:59 GMT

The recent huge drop in oil prices caused some commentators to predict the imminent collapse of OPEC. Some talked about the humbling of OPEC and others talked about the early demise of OPEC. The Financial Times warned on 10th December:

"The OPEC oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over coming months as market forces shake out the weakest producers, Bank of America has warned".

OPEC (the Organization of Petroleum Exporting Countries) was established in the early 1960s by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela. The main objective was to agree a unified approach regarding production and exports to maintain a reasonable level of revenue for their oil. The five countries certainly possessed that power when the cartel was initially formed, and while the cartel still produces about 40 percent of the world's oil, OPEC's dominance has somewhat declined over the years. OPEC has faced challenges throughout its history. Experts predicted the demise of OPEC in the 1970s and also after 11/9 2001.

An American commentator also wondered some months ago "why anyone wants to be in OPEC anymore? Why pay the millions in dues and go to these meetings where the decisions don't even matter?" Then the writer left the reader with a challenging question: Is OPEC still relevant? The writer ignored the fact that OPEC does not only serve the interests of its members but also the interests of non-OPEC oil producers.

The brutal fact is that the non-OPEC producers in USA, Russia, Mexico, Norway, the Gulf of Mexico, Texas and even the marginal operators in Oklahoma and Louisiana are skimming huge profits on the back of OPEC. They are enjoying the free ride aboard the OPEC Wagon of high prices.

It is true that OPEC's share of global oil output has fallen from 50% in 1970 to less than 40% in 2010, but OPEC members still hold 80% of the World Crude Reserve.

In the short term OPEC's biggest headache is the rise in the production of crude oil in the USA and Canada.

The need for crude from the Organization of Petroleum Exporting Countries, which produces about 40 percent of the world's oil, will fall by 1.1 million barrels a day to 29.2 million barrels a day between 2013 and 2018, the Vienna-based group said in its annual World Oil Outlook. Oil production from shale formations in the U.S. and Canada is seen climbing to 4.9 million barrels a day in 2018, compared with an estimate of 1.7 million barrels a day in last year's report.

OPEC still faces problems within its own ranks particularly Libya, Iraq and Iran. The turmoil in Libya and Iraq has led to fall in production and exports. The sanctions against Iran are still in operation. There is a lot of uncertainty at the present due mainly to regional instability and the worsening situation in Syria. Iran and Saudi Arabia distrust each other and their relationship is tense due to Iran's support for the brutal regime of Bashar al Assad.

In the long run OPEC has to deal with Iraq and Iran both of whom have plans for expanding their production and export potential. If and when successfully implemented such plans could pose a serious threat to oil prices. By 2020 the combined production of Iran and Iraq could reach 11 million barrels per day. Even after allowing for increased internal consumption in both countries, the potential export capacity would still be too significant.

But by far the largest factor that will ensure the future of oil and survival of OPEC is the increased dependence of Asian countries mainly India and China on Middle Eastern oil. As OPEC's biggest customer, Asia will continue its strong demand for many years to come which means that prices will not necessarily fall. It must be said however that the impact on long-term prices will be determined not only by the size of Asian growth in the future, but by global oil supplies in non-OPEC countries as well. Apart from the challenges posed by fracking and shale oil production, research into alternative sources of energy such as biofuels and different methods of production and extraction still pose a serious challenge to OPEC's dominance