You’d think that OPEC would be laughing it up right now – all the way to the bank. With oil prices at a lofty $100 a barrel, OPEC’s oil exporters are sucking in petrodollars on a grand scale. But all is not happy in the world’s most infamous cartel. A meeting of the 12 OPEC states last week broke down in acrimony after a Saudi-backed proposal to boost oil output met fierce resistance from a half dozen members, including Iran, Libya and Venezuela. The conference ended without an agreement. The Saudi oil minister called it “one of the worst meetings we ever had.”
That’s miserable news for the world economy. Tight oil markets and high prices will continue to eat into consumption from New York to New Delhi, suppressing demand at a time when the slowing recovery can least afford it. Gas prices in the U.S., though off recent highs, still average a wallet-straining $3.74 a gallon – especially painful with joblessness so severe. But the discord at last week’s powwow is also very bad news for OPEC. Sure, arguments within OPEC aren’t anything particularly new. Nor has the cartel consistently acted as a monolithic bloc. Cheating on OPEC-mandated quotes has not been uncommon. This time around, though, I’m wondering if we’re witnessing something different – something more threatening to the future of OPEC and its ability to influence the global oil market. Perhaps this current price spike is OPEC’s last hurrah?
First of all, the power of OPEC over the global oil market is not what is used to be back in the oil-shock days of the 1970s, mainly because not all major oil exporters are part of the cartel. Most of all, that means Russia, one of the world’s largest oil producers, and a country that has become increasingly influential in oil supply and pricing. Secondly, OPEC quotas and decisions seem to matter less and less. After last week’s failed summit, Saudi Arabia suggested that it would ignore its opponents within OPEC and boost oil production on its own anyway. That’s great for global oil markets –news of Saudi intentions sent prices tumbling – but it raises serious questions about the purpose of OPEC. If a key member like Saudi Arabia is simply willing to flout the wishes and concerns of fellow partners, what’s the point of having OPEC around anyway?
More than that, I think we need to ask if the current divisions within OPEC run deeper than simple disagreements over the outlook for oil prices. In recent years, the Saudis have dominated OPEC decisions, but this time around, they faced opposition from their main political rival in the Middle East, Iran. We have to wonder if regional political rivalries are beginning to tear at OPEC’s cohesion and ability to function. The cracks within OPEC are also closely following both economic and foreign policy lines. Those countries, like Saudi Arabia, that favored boosting production tended to have a lot of spare capacity sitting about that could be producing larger export bills; those opposed, on the other hand, don’t have that luxury and are unlikely to quickly increase production even if they wanted to. Thus the “have-nots” in this case prefer to maximize the dollars they get for what they are able to pull out of the ground. And more interestingly, the split went along pro-West versus anti-West lines, with U.S. allies like Saudi Arabia and the UAE pushing for more output, while Iran, Libya and Venezuela not quite so willing to aid the struggling economies of America and Europe. With NATO planes bombing his army, we can’t expect Libya’s Muammar Gaddafi to play nice on oil prices, can we?
Yet perhaps the biggest threat to OPEC can be found in the high oil prices themselves. The bigger the import bill countries like the U.S. and Japan face, the more incentive they have to replace oil with some other forms of energy. In other words, the longer OPEC enjoys high oil prices, the more its power is likely to be whittled away. The Saudis seem to understand this inverse relationship between prices and influence – thus their interest in keep oil markets stable and prices more moderate. Other OPEC members, those who want to get rich quick or have more severe economic problems, are undermining OPEC’s future by thwarting production increases now.
With schisms in the cartel so deep, can OPEC patch up its differences and become a force again in the world economy? That’s the big question. The future of OPEC may depend on whether its squabbling members can again find common economic interests and set aside political and strategic differences. That’s not impossible. If oil prices fall sharply, OPEC members might be able to get back on the same page. So even though it might be too soon to dance on OPEC’s grave, the world’s most hated cartel already has its best days behind it.