Politics of Power: OPEC

Fifty-four years ago this past September, in 1960, the global cartel known as the Organization of the Petroleum Exporting Countries (OPEC) was founded. Thirteen years later, in 1973, the Arab members of OPEC played their trump card, initiating the ‘Arab Oil Embargo’ in protest to American involvement in the Yom Kippur War. The resulting lack of supply throughout the western world caused the price of oil to leap from three dollars to 12 dollars per barrel throughout the 1970s. More important than this price increase was the newfound global order that placed OPEC at the forefront of global oil production and pricing. This OPEC-centric global order witnessed permanently higher prices. Meeting twice a year in Vienna, Austria, OPEC’s oil ministers set a production quota, deciding to either increase or decrease supply. Though there was always cheating among its members, OPEC has been very effective in keeping prices where they want them to be. Since 2011 the price of oil has remained relatively constant at 100 dollars per barrel. However, just in the past few years there has been increasing speculation that due to America’s own ‘energy revolution,’ the power of OPEC is rapidly declining and might not even survive the next decade in the same capacity.

Since June, the global price of oil has fallen 25 percent, settling at around $80 a barrel this past week. Popular sentiment maintains that seven of the 12 members of OPEC will fail to balance their budgets when oil prices are below $100, and this number only increases as prices fall. The Arab Spring of 2010 and 2011 drove a number of important OPEC members, including Saudi Arabia and the United Arab Emirates, to escalate government spending in order to placate their own populations. These higher budgetary concerns, combined with increasing North American production, have thrown OPEC into seeming disarray. In short, the supply of oil is greater than demand, and it would appear that OPEC has lost its ability to control the supply. In addition, according to industry experts, the costs of finding and producing oil and gas in America will continue to decline. The American energy industry, as a result, might be better suited to weather sustained price drops than OPEC members. Is the end of OPEC upon us?  Though this all seems plausible it does not hold up to the reality on the ground.

OPEC as an institution will exist in whatever form Saudi Arabia deems strategically expedient. These ‘break-even’ oil prices of today, which allow OPEC members to balance their budgets, fail to take into account the trillions of dollars in sovereign wealth funds (SWF) many of these countries possess. In many cases these SWF’s deliver more financial income than the oil revenues of their respective countries. Oil prices are low because of increased supply, and this is exactly what the Saudis want. The Saudis might be trying to stimulate the global economy, manage a slowing Chinese economy, grab market share, strategically contain Russia and Iran (an alignment of American interests) or simply curtail renewable energy projects. Whatever the reason behind Saudi Arabia’s decision to maintain a lower global oil price, the takeaway is just that — it is still Saudi Arabia that is setting the price. Just like the peak oil theory, I expect talk of the ‘decline of OPEC’ to be a contentious issue, but for now, OPEC still has a strong leader with strong direction.