The Myth of OPEC Power

OPEC’s “production” cuts which in fact are an illusion. Prior to the agreement in 2016 to cut production 2%, most OPEC producers increased their production with Saudi Arabia leading as a way to maintain market share.
As oil prices have risen above $60 a barrel, more attention has been given to
As some have observed, the cuts were really just a pull back from the production surge. Since then according to EIA data, OPEC production has not decreased. In 2016, it produced 39.2 million barrels a day, last year it produced 39.2 million, and that is the forecast level for this year. So, while it appears that OPEC production has remained constant, production has actually been increasing to offset the decline in production by Venezuela. Venezuela’s oil production has been declining for two decades as a result of nationalization. In the past two years, its decline has increased, dropping from from 2.3 million barrels a day in January 2016 to 1.6 million in January of this year.

Since other member countries have increased their production to maintain OPEC’s overall level of production it is easy to see why its production agreement has not been breached. A look at OPEC’s 50-year history shows that for most of that history, it has been a price taker and not a price maker. That history also shows that most of the member countries cheat to gain or maintain revenue. Price volatility is clear evidence that OPEC’s alleged market control has always been an illusion.

There are several reasons why oil prices have been increasing. The $30-$40 dollar levels were below what many believe to be the long term equilibrium level. Over the past year, the inventory glut has been reduced as a result of a strong global economy, especially Chinese demand. Add to that increased political turbulence in the Middle East where the Trump Administration has introduced a higher level of uncertainty. Increased tensions with Russia, North Korea, and the potential re-imposition of sanctions on Iran. All of those factors put upward pressure on crude oil prices.

Oil prices are cyclical. They never stay low and they never stay high. Today’s prices are leading to increased production and based on history will lead some members of the OPEC-Russia production agreement to cheat. The likelihood of a return to $100 a barrel oil is remote unless there is some external event that spooks the market.