OPEC's influence over oil prices, and its share in the oil market has fallen over the years, while the cartel's weaknesses have been highlighted with the inability to come up with an official quota last Friday.
While the cartel's share was once over 70 percent in the global oil market, this level now has contracted to around 30 percent, especially with increased production from Russia and the U.S.
Meanwhile, the divisions among the cartel's members and its lack of a unified strategy against low oil prices signal hard days ahead for OPEC, which was once the most influential international body in determining oil prices, and even using oil as a political tool against other countries.
OPEC was founded at a conference in Iraq in 1960 by Saudi Arabia, Iraq, Kuwait, Iran and Venezuela, in response to the U.S. President Eisenhower's imposition of an oil import quota for the U.S. It also aimed to break the dominance of seven international oil companies, also known as the "Seven Sisters," which had a monopoly over oil production and pricing around the world at that time.
However, as Italian oil giant Eni's President Enrico Mattei had foreseen and warned, the Middle Eastern states' increasing influence over oil exploration and production activities lead to the loss of international oil companies' privileged positions in the global oil market.
In the 1960s, the United Arab Emirates, Qatar, Libya, Algeria and Indonesia also joined OPEC, increasing the cartel's daily production to 8.3 million barrels per day (mbpd), and raising OPEC's share in the global oil market to more than 50 percent.
With the memberships of Angola, Ecuador and Nigeria, and OPEC members' governments gaining control of oil production from international oil companies, the cartel's total oil output reached 22.5 mbpd, and its share in oil market increased to 65 percent at the beginning of the 1970s.
Now, the price of a single barrel of oil is determined by OPEC's output capacity and its members' oil production levels. In addition, the cartel has also understood that it could use its influence over oil prices and in the market as a political instrument in world affairs.
After the U.S. had helped Israel during the Yom Kippur War in 1973, Saudi Arabia, followed by other OPEC members, imposed an embargo on western countries by cutting oil supplies. The result was a sudden jump in oil prices, which increased from $3 per barrel to $12 a barrel. During that time, OPEC's share in global oil production was over 70 percent.
- New players
Throughout the 1970s, OPEC enjoyed its powerful position in the global oil market, and the high revenues it generated from oil sales to importing countries.
During the Iranian Revolution in 1979, Tehran cancelled all of its oil contracts with U.S. oil companies, and suspended oil exports to western countries. Coupled with the beginning of the Iran-Iraq War, the price of crude oil increased to $39 per barrel in 1980.
However, the way was paved for countries to focus on their supply security. This was achieved through kicking off oil exploration and production activities on their own soil. This was seen during the Iranian Revolution, the war between Iran and Iraq, and especially after OPEC used its privileged position as a political tool against other countries during the 1973 oil embargo.
The U.S.' domestic oil production reached 8 mbpd, while the Soviet Union's oil output climbed above 12 mbpd. In addition, Venezuela, Nigeria and Mexico became the countries that raised their oil production levels significantly in the first half of the 1980s. This was a time when the rising price of crude encouraged new exploration activities.
The result was increasing global oil supply and falling prices. Between November 1985 and March 1986, oil prices fell from $31 per barrel to $12 a barrel, while OPEC's share in the global market dived below 40 percent by the mid-1980s.
- The Kingdom strikes back
Against falling oil prices, Saudi Arabia insisted that OPEC should cut its output level. However, when the cartel refused to do so, Riyad took the matter into his own hands by trimming its own production, hoping that oil prices would rise.
But, prices did not increase. In response, the Kingdom used its low-cost production as an advantage and increased its output level rapidly towards the end of 1980s, choking the global market with cheap oil. While this move forced high-cost producing countries out of the market, it also became a key strategy for Saudi Arabia which it has used to full effect for over 30 years.
When Saudi Arabia began to increase its output in the second half of 1980s, other OPEC members reciprocated. The cartel's total oil production quickly climbed to 25 mbpd, while its global share jumped above 50 percent. The biggest remaining share belonged to the U.S.S.R. with 13 percent.
- Cracks within cartel
In 1990, Iraqi leader Saddam Hussein demanded that OPEC trim its output in order to increase oil prices, so that its members would benefit from larger revenues.
However, when Iraq invaded its oil-rich neighbor Kuwait, political divisions emerged within OPEC. Saudi Arabia, Qatar and the United Arab Emirates sided with Kuwait to enjoy protection from the U.S. military's might, out of fear that Iraqi hostility may strike them next.
Moreover, members within OPEC began to disagree with one another about the production quota and individual output levels as well. Such divisions were indicators of the first of many polarizations within OPEC.
With the invasion of Kuwait, oil prices increased from $16 to $36 per barrel between August and October of 1990, and remained at that level until 1997.
The Asian financial crisis first hit east Asian countries and did not take long to impact other major economies around the world. With a widespread slowdown in economies and a recession, global oil demand fell significantly and prices collapsed from $25 per barrel in 1997 to $11 a barrel in 1999.
During this period, OPEC countries used their low-cost production as an advantage to boost their output and increase their market share. The cartel managed to raise its share in the global market to 60 percent once again.
- New world order
The attacks against the U.S. on Sept. 11, 2001 marked the beginning of a new era for western dominance over the Middle Eastern security, politics and economies.
The invasion of Afghanistan and Iraq hugely increased the risk of secure oil supplies from the Middle East, and the market reacted accordingly.
Civil unrest and rising insurgencies arose from the U.S.' prolonged presence in Iraq. It was not only Iraq that was in turmoil, but other oil producing Middle Eastern countries as well. Meanwhile, global oil demand was increasing sharply with strong economic growth in developing countries and developed nations.
With supply risks and rising global demand, oil prices reached their historical high level of $147 per barrel on June 2008. OPEC did not wait long to boost its total production to 27.6 mbpd, and benefitted greatly from large revenues. At the time, some analysts attributed high oil prices in 2008 to a surprise oil demand increase from China.
- The worst slump in history
The global financial crisis of 2008, which began in Europe and then quickly spread to the U.S. and other countries, lead to the most rapid decline in oil prices ever.
Prices fell to as low as $32.80 per barrel on the New York Mercantile Exchange, recording a 78 percent dive in the course of a few months.
OPEC decided to cut production again. However, this time, it wanted to coordinate with other major oil producing countries outside the cartel, especially with Russia, to prevent losing its share in the market.
Russia, one of the biggest oil producing countries at that time, promised to trim its output in coordination with OPEC.
The cartel cut its production levels three times between September and December of 2008, slashing a total of 4.2 mbpd during that period, which was more than 10 percent of its annual production.
However, Moscow did not trim its output level. Instead, it increased its oil production so rapidly that OPEC's share in the global market fell from 60 percent to below 50 percent in a few months.
Saudi Arabia was the member within the cartel to carry most of the burden in production cuts. Starting from the third quarter of 2008, the Kingdom trimmed its output by around 5 mbpd on average, and lead to a price increase from $30 to $80 per barrel during 2009. However, the country also lost its market share and a disproportionate share of revenues from oil sales.
- U.S. enters the market
The U.S., the world's biggest economy and the largest oil consumer, had been dependent on oil supplies from the Middle East and South America for decades.
While the world’s only remaining superpower gradually begun to withdraw from the Middle East, the new applications of an existing technology called "hydraulic fracturing" lead the country to produce oil from source rocks, which was later commonly named as "shale oil." The high price of oil due to cuts from Saudi Arabia made it economical for U.S. producers to develop the shale oil resources.
The results were extraordinary. The U.S. managed to increase its oil production from 5 mbpd in 2008 to almost 9.6 mbpd in April 2015. The high oil prices also encouraged U.S. consumers to conserve oil which contributed to lower imports for the U.S., thereby pushing supplies back onto the world market.
OPEC declared its output ceiling as 30 mbpd in 2012, but with rapidly rising output from the U.S. and Russia, the cartel was losing its global share as well. In 2014, while OPEC was producing a total of 30 mbpd, the global oil supply reached more than 90 mbpd, contracting the cartel's share in the market to just a little over 30 percent.
However, in less than a decade, the increasing output from the U.S. was coupled with rising production levels from OPEC members and Russia, leading to additional oil supplies in the global market thus creating a massive glut.
Oil prices peaked at $128 a barrel in 2012, and reached as high as $115 per barrel in June 2014.
- Price slump all over again
When oil prices began falling in the second half of 2014, the market was aware of the glut of supply, and knew that global demand was weak, especially due to the slowdown in Asian economies, particularly China. The result was the worst and the fastest slump after the price collapse of 2008.
Multinational financial institutions were slashing their price predictions monthly, while global investment banks were pondering how the credits they approved for oil producers would return in such a troublesome market environment.
When oil prices fell to $70 per barrel on November 2014, all eyes returned to OPEC's biannual meeting. The cartel revived low oil prices in the past, and was believed to do it once again.
When OPEC members met in Vienna on Nov. 27, the widespread expectation around the world was that the cartel would cut its production while Saudi Arabia would carry the burden, just like in the past.
OPEC's decision shook the world.
The cartel announced that it would maintain its output at its current production level of 30 mbpd, and refused to trim its production against falling oil prices.
Behind this decision was Saudi Arabia, which did not want to carry the burden, nor lose its market share once again.
The Kingdom's strategy was simple. It planned to maintain its individual output, preserve its market share, let oil prices fall even lower so that high-cost producers, such as the U.S. shale oil, would be forced out of the market.
In addition, Riyadh, enjoying its low-cost to produce crude, increased its oil output level significantly to a record 10.3 mbpd from 9.5 mbpd in the following months to raise its market share, rather than to preserve it, and aimed it at local markets in Europe where Russia was dominant.
Saudi Oil Minister Ali al-Naimi blamed non-OPEC producers for the supply glut, and refused to cut production. The Kingdom managed to take control of OPEC, aligning with Kuwait and the United Arab Emirates, and did not respond to emergency meeting requests from other OPEC members, such as Venezuela and Iran.
The strategy paid off when Russia's oil output began to fall. The Russian economy, which was already under pressure with western sanctions due to the crisis in Ukraine, now had to deal with low oil prices and falling gas prices as well.
OPEC refused to cut its production quota once again at its next biannual meeting on June 5, 2015. Oil prices fell to $50 per barrel in July.
- Widening divisions within OPEC
Against the core-trio of Saudi Arabia, Kuwait and the United Arab Emirates; Venezuela, Iran and most of the African members of OPEC urged the cartel to trim its production in order to increase oil prices. The latter countries were medium-scale producers and most of their government incomes were dependent on revenues from oil exports and sales.
Meanwhile, Iran demanded something more -- to have OPEC members "make room" within the cartel's quota for its return to the oil market.
Because of its nuclear research activities, the sanctions on Iran lowered the country's total oil output from 3.6 mbpd in 2011 to 2.8 mbpd in 2014. Tehran aims to increase its oil output by 1 mbpd within six months once removal of sanctions are complete.
Iran's Oil Minister Bijan Zangeneh even wrote a letter to OPEC before the June 5 meeting, and asked the cartel to make room in its production quota. When this request was unanswered by OPEC, he announced that his country does not need permission from the cartel to increase its individual oil production level.
The Saudi strategy and Russia's oil output recovery with a weak ruble led to more glut of supply in the market. Meanwhile, the U.S. oil producers proved to be resilient against low oil prices as domestic production only declined by 400,000 barrels a day from April to reach 9.2 mbpd in late November.
Once again, all eyes turned to OPEC's December meeting in Vienna. As everyone thought OPEC would maintain its quota again, the cartel managed to shake the world once more.
- Saudi-Iran rivalry
On Dec. 4, OPEC failed to announce an official output quota. Under the watchful eyes of a room full of journalists, the cartel's communique did not mention an official production ceiling or a single number to that end.
Finally, it was OPEC’s Secretary-General Abdullah al-Badri and Nigerian petroleum minister and OPEC conference president, Emmanuel Ibe Kachikwu, who pointed out to Iran, that the cartel had postponed their declaration of an official quota until its next meeting in June 2016, with the hope of accommodating Iran's return to the market.
This was a shock for Saudi Arabia, and meant that the Kingdom's influence within OPEC was diminishing, especially in the face of its regional rival.
Riyadh had never wanted sanctions on Tehran to be lifted, and voiced its concerns to Washington in the summer of 2015.
Failing to prevent Iran's opening up to the Middle East and the world, the Kingdom now faces its power being challenged within the cartel, and its strategy under attack.
Saudi Arabia did its best to prolong Iran's return to the oil market, and never wanted to relent its share to its biggest political and economic rival in the region.
However, Iran's return was near, and its confrontation with Saudi Arabia, whether in the oil market or within OPEC, was inevitable.
After all, it was the Kingdom that began producing in higher volumes, regardless of OPEC's official quota, which exceeded 31.4 mbpd in October.
In addition, Riyadh's closed doors to Moscow and Tehran were not forgotten by the latter.
The Saudis did not only lose their control over OPEC on Dec. 4, but they made new enemies from past grudges -- from countries that repeatedly insisted on production cuts.
And as for OPEC, the cartel that once controlled over 70 percent of the global market and influenced oil prices is temporarily lost.
What remains today of the world's biggest oil organization is a forum of quibbles, divisions and disharmony among its members.
By Ovunc Kutlu
Anadolu Agency
ovunc.kutlu@aa.com.tr
