Does OPEC matter?

How the OPEC is gradually losing its relevance…

For close to 55 years, the OPEC virtually held sway over the oil markets. Remember, it was the OPEC that created the Oil Shock of 1973 as well as the crisis of 1998 that almost brought Russia to its knees. OPEC comprises of oil producing nations of Latin America, Africa and the Middle East. For years Saudi Arabia, as the largest producer of crude oil in the world, was the virtual monarch of OPEC. All that has changed in the last couple of years! Here is why.

Saudi hegemony dwindling…

If the latest oil industry statistics are any indication, Saudi Arabia is fighting a different battle now. It has already ceded the distinction of being the world’s largest oil producer to the US. Currently, the US produces 11.6 million bpd as against Saudi Arabia’s 11.5 million bpd. The difference may be marginal, but significant nevertheless. Russia is close behind at 10.6 million bpd. Obviously, the focus of Saudi Arabia is now on maintaining market share and not on determining the price. The day Saudi Arabia stopped being the central bank for oil; that was the day the OPEC started losing its relevance as an oil cartel. Historically, cartels have continued to remain relevant only as long as the pricing power vested in the hands of the cartel. Not surprising, therefore, that the OPEC is increasingly becoming a marginal player in the global oil stakes. This trend will get accentuated in the years ahead.
The Energy of the future…

The OPEC in general and Saudi Arabia in particular is clear that oil is not the energy of the future. Global warming and environmental degradation will not permit oil to survive beyond another 50-60 years. The growth in solar energy globally has been rapid. With cheaper equipment and better grid management, solar is already emerging in countries like Germany, Japan and China as a serious competitor to conventional energy. Saudi Arabia realizes that they have 50 years ahead of them to reap the full dividends of oil as well as to prepare themselves for the future of energy. Obviously, OPEC being an embodiment of conventional energy is likely to be underplayed in the new global energy dispensation.

Finally, the China syndrome…

If there was one piece of statistic that must have intimidated OPEC, it must have been Chinese demand. Between 2013 and 2014, Saudi oil exports to China fell by a whopping 33%. Partly it was an economic slowdown and partly it was the scourge of more efficient cars. There has been a huge improvement in automobile efficiency in the past few years. A gallon of diesel runs cars better for longer distances. A cartel, after all, has relevance when supply is short and has to be managed. No longer! Like the cartels for rubber and tin, OPEC too may be fast losing relevance. ©

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