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Page added on April 4, 2017

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The End Of OPEC Is Near

Production

OPEC, which has far exceeded the average life of cartels, is on the brink of failure. Though cracks have been developing in the cartel since the start of the current oil crisis, the group has managed to stay together so far. Nevertheless, the success of the current OPEC deal for production cuts will decide its future as a cartel.

What is a cartel?

A cartel is a group of like-minded producers, who act in concert—or collusion—to achieve a shared goal of increasing their profits by means of restricting supply, fixing prices, or destroying their competition by illegal means. The average life of the 20th Century cartels has been 3.7 to 7.5 years, according to various studies by Margaret Levenstein and Valerie Suslow. In the past two centuries, cartels have been able to influence prices by an average of 25 percent.

History of OPEC’s success in boosting oil prices

Since its inception, OPEC has been fairly successful in boosting prices by various means. A few of the price increases, however, were due to reasons other than direct OPEC action, nevertheless benefitting their members.

Though the 1973 oil embargo was brought on by political reasons, OPEC used the production cuts of the embargo to boost oil prices from $3 a barrel in 1973 to $12 a barrel in 1974.

The 1979 energy crisis was not a brainchild of OPEC. The production dropped due to the Iran-Iraq war, and the price of oil doubled in about 12 months, again benefitting OPEC members.

OPEC was able to boost prices using production quotas and production cuts following the Asian Financial Crisis in 1997.

What has OPEC done to support oil prices in the current oil crisis?

OPEC, as any cartel would, has used two strategies to influence oil prices. However, both have been unsuccessful in achieving their objectives.

In 2014, Saudi Arabia, the de facto leader of OPEC, attempted to stifle the competition of the shale oil drillers by keeping their production intact. As a result, oil prices plummeted to multi-year lows of about $27 a barrel in February 2016. The drop in oil prices saw 119 North American oil and gas producers file for bankruptcy from the beginning of 2015, according to Haynes and Boone, LLP.

U.S. oil production dropped about 883,000 barrels a day by August 2016, after topping out at 9.7 million barrels a day in April 2015. Nevertheless, the price decrease went well below OPEC’s expectations. Meanwhile, many shale oil drillers used a combination of better technology and hedging to continue pumping oil, despite the low prices.

As its first strategy failed to effect the U.S. shale oil production to the extent presumed, OPEC then adopted a second strategy of cutting production. On November 30, OPEC sealed a deal to cut production after months of difficult negotiation. Though prices bounced and broke out of the $52 levels – a strong resistance – they could not reach the $60 levels preferred by OPEC members.

However, this modest rally in crude oil prices rejuvenated the U.S. shale oil drillers, and U.S. oil production is now on the rise. As a result, crude oil has dipped again and is hovering near the $50 per barrel level.

The market believes that if crude oil prices remain above $50 per barrel, U.S. shale oil production will increase. For this reason, OPEC is finding itself in a catch-22 situation: It is losing market share to the U.S. shale oil drillers, but it is unable to propel prices considerably higher. It is losing its ability to influence prices above a certain level.

What happens if the Cartel fails in its objective

A cartel is able to hold its members only when it fulfills their objective of higher prices, which has not been the case with OPEC. The member nations will now look to fulfill their objective by cheating and acting individually, according to their requirement.

Saudi Arabia, which was the leader of OPEC and the price setter of the world, is losing its clout in OPEC. Even in the current round of production cuts, most of the work is being done by Saudi Arabia, whereas the other members are shying away from their designated quotas.

OPEC has far outlived the average lifespan of a cartel, but if the OPEC members don’t regroup and act together, chances are that the cartel will come to an end very soon.

By Rakesh Upadhyay for Oilprice.com



10 Comments on "The End Of OPEC Is Near"

  1. Plantagenet on Tue, 4th Apr 2017 11:28 am 

    Looks like all it took to bring down OPEC was an extended oil glut.

    Cheers!

  2. rockman on Tue, 4th Apr 2017 11:35 am 

    “Though cracks have been developing…the group has managed to stay together so far.” One more worthless article IMHO. OPEC has never been a effective cartel. As Texas was from the mid 40’s to early 70’s.

    Managed to stay together??? By helping the world produce more oil then ever before in history? That’s pulling together as a cartel? LOL.

    And now after making “drastic production cuts” to increase the price of oil OPEC: as of January OPEC is still producing more oil the at any other time in history prior to the summer of 2016. It still has to cut production almost an additional 4 million bopd to get back to the Feb 2009 level.

  3. Apneaman on Tue, 4th Apr 2017 11:52 am 

    Looks like my prediction that the pissed off, economically locked out eco warriors are going to attempt to burn the cancer down may becoming a reality. I hope so.

    DAPL Developer Reports Vandalism, Physical Attacks On Pipeline

    http://minnesota.cbslocal.com/2017/03/22/vandalism-attacks-dapl/

    Baha

  4. Plantagenet on Tue, 4th Apr 2017 12:50 pm 

    Looks like the the so-called eco-warriors are actually eco-terrorists out to cause oil spills.

    Cheers!

  5. Sissyfuss on Tue, 4th Apr 2017 2:07 pm 

    Plantassinatent, your oil glut may be replaced by a blood glut when the Eco warriors make their stride.

  6. Plantagenet on Tue, 4th Apr 2017 3:20 pm 

    What kind of eco-warriors try to sabotage pipelines and cause oil spills?

    AND Who is paying the eco-warriors anyway? The only person who gains by blowing up oil pipelines is Billionaire Warren Buffet who has been making big bucks because the Ds arranged things so all the oil was traveling via his railroads instead of in safer pipelines..

    Cheers!

  7. rockman on Tue, 4th Apr 2017 5:48 pm 

    From the link: “Authorities in South Dakota and Iowa confirmed Tuesday that someone apparently used a torch to burn a hole through empty sections of the pipeline at aboveground shut-off valve sites.”

    So the concern about potential pollution has led some protestors to damage the pipeline that could lead to spilling oil onto Standing Rock land.

    Yeah, that makes sense. Of course, now if a pipeline company mistake causes a spill they can now point a finger at “protestors”.

  8. Apneaman on Tue, 4th Apr 2017 5:48 pm 

    End Of OPEC Is Near Ha! End of the planet of the Apes will follow smartly.

    Expert explains Future Sea Level Rise (2017)

    Eric Rignot (NASA/JPL) one of the world’s most prominent glaciologists, who is behind a landmark report revealing the unstoppable collapse of a large part of Antarctica

    http://climatestate.com/2017/04/04/expert-explains-future-sea-level-rise-2017/

  9. joe on Wed, 5th Apr 2017 10:42 am 

    Apneaman has the right answer on this issue. None of this oil sh1T matters, not in 50 years. 2017 so far has the third warmest january and second warmest February on record, my prediction is that the second half of this years will blow records away due to northern hemispheres greater land area.

  10. Apneaman on Wed, 5th Apr 2017 11:08 am 

    Morning kids. Can we say cognitive dissonance?

    Global warming denier James Inhofe says the Environmental Protection Agency is “brainwashing our kids”

    Inhofe praises Trump’s budget, because it slashes the EPA’s budget

    http://www.salon.com/2017/03/16/global-warming-denier-james-inhofe-says-the-environmental-protection-agency-is-brainwashing-our-kids/

    Oklahoma U.S. Sen. Inhofe says wildfire damage is ‘unprecedented’

    http://kfor.com/2017/03/10/oklahoma-u-s-sen-inhofe-says-wildfire-damage-is-unprecedented/

    2017 already among Oklahoma’s most active wildfire years

    http://www.news-star.com/news/20170404/2017-already-among-oklahomas-most-active-wildfire-years

    Thus ends today’s presentation on How To Square A Circle.

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