Opec has lost its influence on oil prices. The US has become one of the main producers and actors in a market of 3.4 billion dollars thanks to the boom in fracking. As a result, Opec is starting to embrace the idea that the balance of forces has changed, and that it no longer has exclusive control over the supply and demand of the black gold.
Oil prices plummet
Led by Saudi Arabia, Opec had decided in its November meeting not to take any steps towards changing its production quotas, resisting Venezuela’s pressure to cut production in order to stop the sharp fall in oil prices. The cartel of 12 oil-producing countries had chosen to keep its official output to a ceiling of 30 million barrels a day.
Reaction from the commodity markets followed swiftly. The price of a barrel of Brent (a major benchmark for purchases of oil worldwide) plummeted to a four-year low, approaching the 70-dollar floor.“The fall in prices does not show any fundamental change. We want to wait and see how the market reacts,” said the secretary general of the organisation, Abdalla Salem el-Badri, at the end of the Vienna summit. OPEC currently provides 40% of the world’s crude oil, and the ceiling on its output has remained stagnant since the beginning of 2012. The barrel has experienced a depreciation of 35% since January, and is well on the way to ending its worst year since 2008.
The boom of shale oil production
Despite the conflicts in Ukraine and the Middle East, which have not interrupted the output from Russia and Iraq, oil has entered a ‘bear market’ pushed by the boom of shale, allowing the US to have its largest production in three decades. Comments from Saudi Arabia that the market will stabilize by itself show that pumping less crude is not the intention of the largest exporter country. Its allies Kuwait and the United Arab Emirates have maintained that there exists an oversupply in the market but that it does not come from Opec, clearly pointing to the US. However Venezuela, with foreign currency reserves close to a 10-year low, supports cutting down production to push prices up. Its chancellor and representative at Opec, Rafael Ramírez, has said that “everyone has to make some sacrifices” , defending the 100 dollars per barrel as a “fair price”.
After four years of an unstoppable rise of oil, during which the price had soared to an all-time record, it was corrected in mid 2014. The barrel of Brent reached 115 dollars in June despite more fuel-efficient cars being sold. Meanwhile, supply was expanding as high prices made more costly techniques such as fracking and deepwater drilling profitable. But everything started to change during that summer. Chinese imports sank, Europe was on the verge of a recession, and the strong US economy let its currency appreciate, thus making oil barrels –listed in US dollars– more expensive.
Saudi Arabia defends its quota
Despite stopping their flow of oil into the market Gulf exporters engaged in a price war to defend their market quota. Although now, with new supply sources like shale production, Opec no longer calls the shots on this issue. The situation has changed a lot since the time when the Arab cartel used its power with political intention, and hit the global economy after the 1973 and 1979 embargoes. Saudi Arabia still has much to win in this new scenario, as low prices affect its political and economic enemies such as Russia and Iran, which face sanctions imposed by Western powers. Cheap oil also helps Saudi producers vis-à-vis US oil, which has higher production costs.
The future: cost or depletion?
The world’s consumption of energy is on the rise, and oil is increasingly expensive, since the cheaper and easier-to-obtain crude has already been extracted. This observation has given rise to the Hubert Peak oil theory: this predicts that world oil production will reach its zenith but will subsequently plummet as quickly as it grew, highlighting the limiting factor for oil extraction is the energy required to do it, and not its actual economic cost.
Those who oppose this theory argue that technological innovation allows the US to access shale oil and gas in huge deposits, though more money needs to be invested in the process. The issue is therefore not the quantity but the cost. The other factor is obviously demand, and its surprising weakness shown this year, which poses doubts about the future of oil, especially now that consumption is more efficient and that renewable energy sources are increasingly widespread. A day might come when oil will be cheap because nobody will want it, but it may be too late to stop global warming.