What is OPEC, and what is its role in the market?
Founded in 1960, the Organization of the Petroleum Exporting Countries (OPEC) is made of 13 major oil-exporting countries in the world. OPEC was founded to coordinate its members’ petroleum policies and additionally, to provide technical and economic aid. Currently, the organization’s aim is to manage the oil supply seeking to set the oil prices in the world market, in order to avert potential fluctuations that will affect both the producing and purchasing economies.
OPEC member countries are; Iran, Iraq, Venezuela, Saudi Arabia, Venezuela (the five founding countries), plus the United Arab Emirates, Algeria, Congo, Libya, Gabon, Angola, Equatorial Guinea, and Nigeria. Although OPEC, makes up a great proportion of the supply, it is important to know that there are other major producers that are not members such as; Russia, China, and the United States. OPEC produces 40% of the world’s crude oil and its exports make up 60% of the total petroleum traded internationally.
What is the current situation in the oil market?
Not only petroleum prices, but energy commodities collectively are cruising at extremely high levels. The recent easing of peak prices has given the world some breathing room; however, forecasts suggest that it is a matter of time before the prices head up again. WTI Crude oil is up 32% in the past year, even after the 11% decline in the past month (as of 24 July 2022).
President Biden’s campaign stopped in Riyadh in mid-July, hoping for some cooperation between them and Saudi Arabia. Biden had serious promises to his nation concerning oil and many other factors, which have turned out to be hollow as the market tightened, leaving the U.S. President no choice but to plead for Saudi assistance. This trip is an indication of how the oil market can affect, even the Biden administration, to change their foreign policy. At the time of Biden’s election, it seemed almost impossible for him to sit down with Saudi Crown Prince Mohammad Bin Salman (MBS), but that is not the case now. 5 dollars per gallon for gasoline and 6 dollars for diesel is all it took to change up the ideals of the president.
Saudi supply is a major market decider at the global level. Their productions and policies are likely the sole most important factor in global crude oil prices, hence, Biden’s friendly visit. Below, you can see the changes in Saudi Arabia’s crude oil production versus WTI (West Texas Intermediate) crude oil prices.
Oil markets almost always respond to changing expectations of supply and demand, the chart above shows the price changes of U.S. oil responding to production changes in Saudi Arabia quite vigorously. The chart emphasizes clearly the level of influence of Saudi production.
Can OPEC meet expectations in the near future?
Seemingly, yes. One of the purposes of OPEC’s existence is to regulate market prices. They do this by controlling supply and keeping spare capacity. Spare capacity is officially defined as the volume of production that can be reached within 30 days plus, kept at that level for at least 90 days. it can be used in times of tightness to push the balance back. Supply capacity can be considered to be the means for OPEC to respond to crises in the world that can potentially decrease the global oil supplies.
Saudi Arabia, being the largest oil producer of OPEC and the largest oil exporter in the world, has historically had the greatest spare capacity of all. The nation has usually kept 1.5 to 2 million barrels per day of spare capacity to us for market management. After the visit from Biden, the crown prince MBS, said that they will do what is necessary for the market but nothing more.
As can be seen above, oil prices soared between 2003 and 2008 when spare capacities were at low levels. Currently, the capacities are not high and comfortable either, nevertheless, not as bad as it was back then. Spare capacities have been used starting from the third quarter of 2021. In this chart, you can see the forecast of the U.S. Energy Information Administration up until 2024 and it is looking promising.
The war in Ukraine is certainly a major exacerbator of the current market conditions as well, and although it is hard to make up such a great proportion of the supply deficit arising from the conflict, there are many potentially beneficial paths that can be taken. The use of spare capacity is the greatest asset of OPEC against rising prices, however, reaching any lower than 2.5 million barrels daily (approximately the current levels) can trigger further soaring of oil prices.
Can non-OPEC nations make up for the backlashes in supplies from Russia?
Biden’s management of the oil industry in the U.S. is perhaps not very favorable of the market. Leasing terminations on oil and natural gas, tax threats on windfall profits, blocking of pipeline constructions, climate-related restrictions, disclosure requirements, and many more. These market conditions are pushing investments and incentives away from the U.S., making a great chunk of oil production capacity inaccessible. Biden administration is favoring foreign oil more than domestic, perhaps, because of environmental goals. Nonetheless, Venezuelan sanctions were eased by Biden, increasing the exports of what is probably the most emission-intensive oil in the world. The U.S. oil production emissions are far lower than that of the OPEC countries and even so, the regulations are not eased, but further emissions were permitted outside of the country.
Additionally, Iran is a country with significant producing capacity, yet, is limited by strict sanctions. With the easing of U.S. sanctions on Iran, the global supply can be raised by approximately 2 million barrels per day. That is approximately the current spare capacity of the OPEC countries collectively. However, this reconciliation has never been a popular topic amongst U.S. voters, motivating Donald Trump to torpedo the original Iran deal. Although Biden has attempted to resurrect it, public opinion was strongly against it, and the current officials of Washington and Tehran are pessimistic on the topic.
Finally, it is important to show the disruptions in oil supplies of OPEC and non-OPEC nations; as you can see above, there is a significant difference in disruptions. We must consider that there is a 3 to 2 ratio favoring OPEC in global trade volumes but even so, the disruptions that non-OPEC nations face are significantly less than that of OPEC nations. This suggests that supplies and trade lines of non-OPEC nations are far more sustainable and reliable at the global level.
To sum up, perhaps it is important to consider that OPEC is not as efficient as it is thought to be and the world has greater potential to decrease the dominance of OPEC in global markets with increased participation of non-OPEC nations in the global trade of oil.
- Eberhart, D. (2022, June 15). As Gas Prices Soar, Biden’s Bended-Knee Tour Of OPEC Nations Continues. Forbes. https://www.forbes.com/sites/daneberhart/2022/06/15/as-gas-prices-soar-bidens-bended-knee-tour-of-opec-nations-continues/?sh=5e406b755bb1
- EIA. (2016). Energy & Financial Markets – Crudeoil – U.S. Energy Information Administration (EIA). Eia.gov. https://www.eia.gov/finance/markets/crudeoil/supply-opec.php
- El Wardany, S., Hordern, A., & Martin, M. (2022, July 16). Bloomberg – Saudis Say Oil Decisions Are for OPEC+ as Biden Leaves Kingdom. http://Www.bloomberg.com. https://www.bloomberg.com/news/articles/2022-07-16/saudi-minister-opec-will-keep-doing-what-s-right-for-market#xj4y7vzkg
- Fanzeres, J. (2022, July 22). Bloomberg – Oil Falls a Third Week With Anemic Demand and Economic Data. http://Www.bloomberg.com. https://www.bloomberg.com/news/articles/2022-07-21/oil-heads-for-longest-losing-run-this-year-in-boost-for-biden#xj4y7vzkg