Oil Market Still Shaped by OPEC, but Its Role Is No Longer Central

Today, decisions taken by three key producers – Russia, Saudi Arabia and United States – matter more than OPEC policies. But it is too early to deem the oil cartel irrelevant, writes Valdai Club expert Danila Bochkarev. 

It is rather unlikely that Saudi Arabia will formally push for formal disintegration of OPEC despite numerous media reports that a Saudi Arabia think-tank is studying the possible effect of the OPEC break-up. These reports were immediately denied by Saudi officials – for instance, the country’s energy minister confirmed that there are no plans to abolish OPEC. This is most likely just a study assessing the potential impact on the market of such – improbable for the moment – decision. 

Furthermore, Saudis still see their energy links to OPEC (and Russia) as useful for the Kingdom’s energy strategy. Saudi Arabia recently announced plans to reduce oil output by 500 thousand barrels per day as of December and is pushing other hydrocarbon producers to follow the suit. On November 11, Reuters announced that the Kingdom is discussing a proposal that “could see OPEC and non-OPEC oil producers cut output by up to 1 million bpd”. 

The recent sharp decrease in oil prices following consumption decrease estimates made both by the IEA and OPEC is likely to lead to more cooperation between the Kingdom and OPEC/Russia. 

Global Oil and Gas Imports
Global purchases of imported crude oil totaled US$873.4 billion in 2017.

Despite criticism towards OPEC, Riyadh does not pose a threat to the organization. On the contrary, internal political developments in the United States, including those related to the November midterm elections, had and still have a (limited) potential to affect OPEC. High profiling of oil prices and OPEC in the US and international media was mostly due to the importance of gasoline prices as one of the election campaign centerpieces. Furthermore, in July 2018, US Senator Charles Grassley introduced a version of NOPEC No Oil Producing Exporting Cartels) Act. NOPEC was originally proposed by Senator Herb Kohl in June 2000 in order to create a legal base for lawsuits against foreign governments over petroleum price and production manipulation. Both Presidents Bush and Obama threatened to veto the act, but President Trump – an open critic of OPEC – has promoted NOPEC. 

The issue was taken quite seriously by the international legal firms advising OPEC. Reuters has reported that OPEC discussed the NOPEC bill with White & Case, and the lawyers “advised avoiding public discussion of oil prices and rather talk about the stability of the oil market”. 

Thus, the legal proposal – still not enacted into law – already influences the behavior and communication strategy of OPEC. However, experts do not believe that this document will become law in the near future. Writing for Africa Oil & Power, Michael Ehrenstein from Ehrenstein|Sager rightfully noted that NOPEC “very likely will not become law… this NOPEC Non-event reminds me of Shakespeare’s Much Ado About Nothing – reflecting a great fuss being made of something ultimately insignificant”. First at all, the issue of anti-cartel legislation is becoming less relevant in the post-election period. Second – a point rightfully mentioned by Ehrenstein – the practical use of the NOPEC Act may be deemed unconstitutional due to potential collisions with the principle of separation of powers. 

World Oil Markets: Expect More Volatility and Instability
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On September 23, Algeria hosted a meeting of the OPEC+ ministerial monitoring committee, which discussed the overall situation on the oil market. Earlier US President Donald Trump called on OPEC to reduce oil prices immediately, naming it a “monopoly” and accusing it of manipulating the market.

However, this discussion underlines the decreasing role of OPEC in global energy affairs. OPEC members states have different energy agendas and it is getting increasingly difficult to find a compromise. The oil market is still shaped by OPEC, but its role is no longer central. Nowadays, decisions taken by three key producers – Russia, Saudi Arabia and United States – matter more than OPEC policies.

The recent decrease in oil prices would not lead to immediate significant change in Russia’s market behavior and Russia’s oil output.

In January – October 2018, Russian federal budget surplus reached 3.6 %. The average oil price should reach $59/barrel in 2018 and $48.8/barrel in 2019 for the federal budget not to go into deficit. There is always the temptation of high price for oil producers like Russia, but Moscow remembers that excessively high oil price helps competing sources of energy – both renewables and unconventional hydrocarbons – and may well lead to a real price collapse.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.