OPEC may not be dead, but it is not what it was before

Not long ago, this group controlled, almost entirely, the oil market, but now it is dominated by other leaders

Police watch the headquarters of the Organization of Petroleum Exporting Countries.

Police guard the headquarters of the Organization of the Petroleum Exporting Countries (OPEC) while journalists wait outside ahead of the OPEC and NON-OPEC meeting in Vienna, Austria, July 2, 2019. REUTERS/Lisi Niesner

LatinAmerican Post | Pedro Bernal

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Since its foundation in 1960, the Organization of Petroleum Exporting Countries (OPEC) has exercised strong control over the international oil market. They proved it in 1973 when the decisions of the organization led to what is now known as the 'oil crisis' by banning the oil exportation to countries that supported Israel in the Yom Kippur war and increased the price of the barrel on 400%, from USD $3 to USD $12.

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Although they did not affect the outcome of the war in Israel, the increase had lasting effects on the world economy and changed the global energy landscape by demonstrating the dangers of relying on oil and, particularly, Arab oil. However, nowadays, OPEC could not make any movement such as that one, even if they wanted to. Today they don't have the oil monopoly that they had at that time, plus, they would face more resistance.

OPEC is not dead yet, as it retains control of a significant portion of the world's oil production. For 2018, among all its members, they accounted for 81.5% of the proven reserves of crude oil and 44% of world production. The problem is that these figures no longer give the power they gave before, leaving the organization at risk of falling into irrelevance.

Limiting its production

Only five years ago, the barrel of oil was sold above $100 dollars. Now, OPEC is doing everything it can to prevent the price of the barrel from falling well below USD $60. Its strategy since 2017 to achieve this, has been to cut oil production in its member countries, preventing the supply from growing.

The measure has been successful in preventing the fall of oil price, because today the Brent oil barrel sells for USD $64.51, but has come at the expense of OPEC's own relevance.

According to CNBC, the cuts in oil production since 2017 have resulted in OPEC countries have had their lowest level of participation in the international oil market in almost three decades.

Giving control to the United States

Its low participation is also due to the recent extractive explosion in the United States, which has exploited unconventional deposits of shale (oil extracted from the interior of certain rocks) that have made it the leading producer of oil in the world. The daily US production of 12.1 million barrels per day exceeds that of countries such as Saudi Arabia and Russia.

This is how OPEC slowly resigns itself to play a secondary role in the oil world. Cutting production may help keep prices stable, but it will not work for long if the United States intervenes and takes care of itself to increase demand to reduce the price.

The president of the United States, Donald Trump, has already demanded the leader of OPEC, Saudi Arabia, to help reduce oil prices if they want continued help against their rival, Iran. Since OPEC confirmed that it would extend production cuts until 2020, the United States will be able to make use of the power its growing production gives them to flood the market and lower the price themselves.

In addition, the United States uses other mechanisms to limit OPEC's range of action. Two of the main member countries of the organization are subject to economic sanctions by the Trump government, Venezuela and Iran.

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In these two countries, oil production has been reduced more than in any other country of the organization, even taking into account that all members have reduced their production as part of the pact to limit the supply. This shows that decisions made by the United States, such as Donald Trump's sanctions, can have more effect on OPEC countries than OPEC itself.

A bad omen from Iran

For Iranian oil minister Bijan Zanganeh, OPEC lost its authority and is on the verge of collapse. "OPEC could die," he said. "He lost his authority and is on the verge of collapse."

Zanganeh's concern arises from the new leadership of the organization, which falls on Saudi Arabia, a historical rival of Iran, and Russia, which only enjoys the status of observer within OPEC.

But this concern is justified since Russia has exercised increasing prominence in the decisions of the organization in recent months, which erodes the authority of OPEC and the legitimacy of its operation within.

It was Vladimir Putin, for example, who announced the extension of production cuts until 2020. He did so in the framework of the G20 summit in Japan, with the Saudi crown prince, Mohammed bin Salman, behind him, and without even waiting for the official OPEC meeting in Vienna.