OPEC isn’t the market-moving force it once was
Inever much liked the OPEC oil ministers. Years ago when I periodically covered the Organization of the Petroleum Exporting Countries, they were the 800-pound gorilla in the room. In every room, in fact.
The ministers acted like they owned the world because, with everyone desperately depending on what they produced, they did. They were imperially pompous and demanded deference. Not just from journalists like me who reported on their meetings from Vienna to Algiers, but from nations that feverishly bought the barrels of oil they fervently filled. Including the United States.
So I don’t shed tears now that the price of oil has gone so low, the nations that produce it are just as desperate as the ones that use it. Nor that the deal OPEC will enact Jan. 1 to trim petroleum production — to shrink the surplus and force higher prices — is destined to disintegrate. As soon as some producers calculate that lower output at higher prices makes them even less money than higher output at lower prices, they will cheat and the united front will fail. That’s not a wild prediction; it’s a fact from history. What could stop them from undermining the deal? Like the Pope, OPEC has no army to enforce its will.
The 800-pound gorilla has grown weak. Saudi Arabia has taken such losses from the low price of oil (and from waging war in its region) that it has cut subsidies to its citizens for the first time ever — for water, electricity, even gasoline — and is contemplating taxation for a population that has heretofore never paid a penny in tax. Sanctions cost Iran so much that it’s eager to pump every barrel of oil it can, not to mention regaining its once-impressive market share and shoring up its rivalry with Saudi Arabia (and waging its own wars). And Iraq? Already ravaged by war, it needs every dollar it can earn to keep from sinking into irreparable anarchy.
OPEC countries have an ominous complication, though: they don’t even produce half the world’s oil any more. Saudi Arabia is still the biggest, but do you know who comes next? Russia. Although not part of OPEC, Russia has agreed to also make small production cuts, but it has its own problems, namely that almost half its undiversified economy is funded by petroleum. It’s even contemplating a dip into its version of Social Security to bolster its federal budget. Russia cannot afford to reduce its revenue from oil.
And who comes next? The United States. Thanks to increased efficiencies in extracting our own home-grown energy and to our growing reliance on renewable energies, we are on the verge of energy independence. Back in the 1970s, out of political pique, OPEC embargoed oil to the United States and we looked like a Third World lackey, waiting in long lines to fill our cars with gas. Today, OPEC can no longer hold that noose over our heads.
One last ingredient to allay the impact of the OPEC agreement: almost all the OPEC countries the past few months have ramped up their production to near-capacity. Which means reducing their output will basically bring it back to where it already has been.
Make no mistake, some of our most important European and Asian allies still deeply depend on OPEC oil. If they get hurt, we get hurt. And, as the price of oil goes a little higher because of the coming cutbacks, the price of a tank of gas will, too (although, relative to the price of gas back in 2014, not much).
But even against those prospects, OPEC’s production cuts shouldn’t be appallingly painful. In fact they might even be helpful, because when the world price of petroleum trends up, producers in our own country have new incentives to restart their drills and reopen their wells. Which ultimately enhances our own economy. And our energy independence.