Will OPEC go the way of other cartels in history?
The sharp fall in oil prices since June 2014 has raised serious questions about the role of OPEC. The Organization of Petroleum Exporting Countries (OPEC) has for long held complete sway over crude oil supply and pricing. The year 2014-15 proved that the OPEC was no longer pre-eminent in oil. What does this mean for the future of the OPEC?
OPEC is huge, but not swinging…
Of the total oil output of 90 million barrels per day, the OPEC countries account for about 36 million barrels. With a 40% market share, the OPEC still wields considerable clout. But there are two key issues of note here. Firstly, there are differences within the OPEC. Over the last 6 months, Venezuela and Nigeria have been firmly for OPEC cutting supply. The GCC nations were all for maintaining market share, even if it meant supply at lower cost. The GCC prevailed but the dissensions within the OPEC were out in the open.
Secondly, low interest rates the world over means funding is easily available for capital intensive oil drilling. Hence American Shale and Canadian Sand drillers have become swing producers. This has substantially clipped the clout that the OPEC used to enjoy.
All cartels inevitably dissolve…
A recent report by the World Bank has made an interesting analysis of famous cartels in the 20th century which eventually crumbled under the weight of contradictions. Typically technology shifts and macro shocks have been responsible for the death of cartels. Let us look at some of them.
The Tin Cartel was formed in 1954 at a time when tin was the default choice for packaging. The advent of aluminum changed all that. In aluminum, you had a product that was lighter, cheaper and less vulnerable to corrosion. As the application of tin reduced gradually, the tin cartel began to lose clout before folding up in 1985. Similarly the rubber cartel formed by Malaysia, Indonesia and Thailand was strong till the Asian crisis of 1997. As Asian currencies crumbled against the US dollar, local manufacturers became bankrupt and the rubber cartel dissolved in 1999. So what happens to the OPEC?
What time OPEC?
At 40%, OPEC is big but its clout is waning. The incremental oil is coming from shale, sand and bio-fuels. As the world moves towards the climate commitment of no fossil fuels by 2100, what happens to OPEC? It may crumble under its own contradictions. Alternatively, the Arab nations may not find the job of playing oil police too exciting. Either ways, the oil cartel may not have many years to continue. Call it technology or macro-shock; OPEC’s clock may have finally started ticking. ©