–By Gideon Osaka
This question is more appropriate in no other time than now that the Organization of Petroleum Exporting Countries (OPEC) appears to be grappling with internal crisis and lack of cohesion among its members, with the attendant pressure by the President Donald Trump government to increase oil production and engender low oil price.
There is no doubt that fading OPEC influence has everything to do with the energy renaissance in the United States. The United States has emerged as one of the world’s top three oil producers, recently overtaking Russia to become the world’s top oil producer, a dramatic turnaround from 10 years ago that has readjusted the world order and shaken OPEC. In late November, 2018, the United States was a net oil exporter while shipping a record 3.2 million barrels per day, bpd of crude oil, more than double the volume from a year ago. It was the first time petroleum exports exceeded imports since 1949.
US producers have added a volume equivalent to the entire output of OPEC’s Nigeria in the past twelve months, reaching record high crude production at 11.7 million bpd in November. According to the Energy Information Administration, EIA, US crude production could reach 12.05 million bpd in April, six months sooner than forecast in October, and reaching 12.29 million bpd in December 2019. These are the worrying statistics for OPEC, as it loses control in determining world oil prices and market share to producers in the United States. While Russia has worked with OPEC in the past, Saudi Arabia clearly eyes Russia as an essential partner to guide world oil prices through targeted production cuts.
As the Moscow-Riyadh partnership strengthens and OPEC cohesion frays, the growing power of the United States over the global oil markets was clearly a factor during the negotiations in Vienna last December. The debate is still on whether the OPEC+ deal to cut 1.2 million bpd during the first half of 2019 will be enough to offset surging production from the United States and bring the markets into equilibrium.
Even before last December’s meeting and the acrimony leading up to it, OPEC faced an ominous future. News reports surfaced in early November that King Abdullah Petroleum Studies and Research Center (KAPSARC), a think tank based in Riyadh, was conducting a study on what it would mean if OPEC dissolved. KAPSARC, which is headed by former US EIA Administrator, Adam Sieminski, has been considering what the end of OPEC would mean to world oil markets and to Saudi Arabia’s role in those markets.
The US is not a member of OPEC, a cartel that is regarded as an anathema to the free-market capitalism of the world’s biggest economy. Yet, US presidents have long pressured its top producer, Saudi Arabia, to adjust oil production policies, usually to lower petroleum prices.
President Donald Trump has abandoned quiet leverage for loud protest, tweeting during the last meeting of OPEC in December 2018 that “Oil prices are too high. OPEC is at it again. Not good!”
According to Mohammed Aly Sergie, an analyst for Bloomberg News, Trump wants lower petroleum prices as Americans head into the summer driving season. Average pump prices in the US were up 13 percent in 2018, rising above $3 a gallon in April 2018, the first time to witness such a rise since 2014.
Trump has tweeted about the Organization of Petroleum Exporting Countries at least 63 times since 2011, repeatedly saying the group is “ripping us off” and that crude should cost no more than $25 a barrel.
“Trump’s most recent shot came when he said Saudi Arabia’s King Salman agreed to boost output by as much as 2 million barrels a day to make up for lower production in Venezuela and potential disruptions in Iranian supplies.
“While the White House later backed away from an agreement, the tweet came after oil and gasoline prices surged few weeks ago even after Saudi Arabia convinced OPEC to potentially add nearly 1 million barrels a day to the market.”
Sergie believes that OPEC has been a punching bag for US politicians since the 1970s, when the group had far more power over oil prices than it does today. According to him, Republican presidents, especially George H.W. Bush and his son, used diplomatic channels with Saudi Arabia, the world’s biggest exporter which pumps almost one-third of OPEC’s output.
Prior to Trump’s public berating, Bill Richardson, the Energy Secretary during the second administration of Bill Clinton, phoned the Saudi oil minister in the middle of an OPEC meeting in 2000, asking for a production increase, enraging other members of the cartel and exacerbating a schism between Saudi Arabia and Iran.
He explained that President Trump has been a vocal critic of OPEC for decades, first in his books and then via Twitter. “He has gone further than other presidents in commenting on specific oil prices and production levels, and has mused about how much money the average American would save if we busted the OPEC cartel. This track record is important because U.S. lawmakers have resurrected the “No Oil Producing and Exporting Cartels Act,” or NOPEC, which could make the group subject to the Sherman antitrust law, used more than a century ago to break up the oil empire of John Rockefeller. However, US politicians haven’t succeeded in passing the NOPEC bill despite several attempts since 2000.”
Earlier, Saudi Arabia urged OPEC and its allies to curb output by at least 1.3 million barrels per day, or 1.3 percent of global production. The participants had reportedly discussed the idea of reducing output in 2018 by reverting to production quotas agreed in 2016.
Major news media outlets have even claimed Trump tricked Saudi Arabia into increasing output, which led to the current oil price plunge. He reportedly convinced the kingdom to raise output by promising to impose sanctions targeting Iranian oil exports. But Trump eventually allowed a number of countries to continue to buy Iranian crude, causing an overabundance of crude on the global market leading to lower prices.
However, Saudi Energy Minister, Khalid al-Falih, believes that Saudi Arabia doesn’t need US permission to cut oil output. “The US is not in a position to tell OPEC or Saudi Arabia what to do,” he told journalists when asked about Donald Trump’s reaction to curbing production of crude by the kingdom or the oil cartel, at the last OPEC meeting, December 6, 2018.
“I don’t need approval from any foreign state when it comes to the issue of energy production,” he added.
Yet, OPEC appears to be in crisis. The last OPEC meeting in Vienna offered new insights into the cartel’s raging cold war that is tearing it apart and threatens to ultimately make the cartel irrelevant.
In a two-year period since the group of 15 major oil producers formed an alliance with Russia, OPEC’s smaller members have been marginalized, their voices have been diminished and Saudi Arabia seems to prioritize its partnership with Moscow above all else.
This partnership between Saudi Arabia and Russia is causing dissension within OPEC, with Qatar, one of the oldest members announcing it would withdraw from the organization this January.
With Russia tightening its grip over OPEC’s decisions and the United States officially nearing the net oil exporting status in late November 2018 for the first time in decades, even if only briefly, the new world oil order is now seemingly dependent on three energy superpowers: Saudi Arabia, Russia and the United States.
OPEC has been under the barrage of external and internal forces since the day of its inception in 1960. Yet, even during the most tumultuous years of the Iran-Iraq war in the 1980s, OPEC still met twice a year and managed to coordinate policy to support the price of crude oil. This was not the case during the pivotal OPEC meeting last December in Vienna, where geopolitics ruthlessly invaded the talks.