Iraq, Iran, Saudi Arabia, Kuwait, and Venezuela established the Organization of Petroleum Exporting Countries (OPEC) in 1960 in Baghdad to challenge the dominance of seven American and British oil companies. At a point in 1973, OPEC Arab members embargoed oil exports to the US as a response to Washington’s support to Israel in the Yom Kippur War. However, the cartel has been increasingly sidelined toward the US due to geopolitical shifts and a surge in America’s crude production.
The 1973 embargo prompted a sharp increase in US fuel prices and brought the economic giant to its knees. However, the US has been increasing its hydrocarbon production in the last decade, and OPEC is no more a threat to the US. OPEC controlled over 50% of the world’s crude output at its heyday, but it has declined to about one-third on rising rival production. The cartel allied with Russia and some other producers to leverage its bargaining power. Still, it has repeatedly yielded to Trump’s pressure to adjust its production.
At the same time, President Trump developed closer relationships with Saudi Arabia’s crown prince Mohammed bin Salman. Saudi Arabia has been the de facto leader of OPEC after US sanctions put Iran’s and Venezuela’s oil production to near a halt. Saudi Arabia now accounts for 35% of OPEC’s production, compared to Iran’s 7.5% and Venezuela’s 2.3%. Iran and Venezuela have been regular opposers to US pressure, but their strained economic muscles made other members careful to line up with them.
When oil prices became too expensive for Americans in 2018, Trump on June 13 pointed fingers at OPEC and urged them to produce more oil. In gathering in Austria on June 22, OPEC agreed to increase crude output by 1 million bpd. OPEC officials said that US sanctions on Iran and Venezuela were the culprit behind high oil prices in 2018-2019. This year, the coronavirus pandemic pushed American oil prices to below zero, hurting American oil producers. Trump in April brokered a talk between Mohammed bin Salman and Vladimir Putin to reach a deal in an unprecedented oil supply cut.
Former OPEC officials in a report by Reuters said that OPEC’s decision is now made not for its members’ economic interest. During the uprising to oust Libya’s Muammar Gadaffi, oil prices soared, and Saudi Arabia asked OPEC members to increase production to ease prices, but Algeria, Angola, Ecuador, Iran, Iraq, Libya, and Venezuela rejected such a proposal. Now, the dynamics have shifted, and vocal voices within OPEC appear to wane.
In its 60 years of life, OPEC has proven to be crucial in maintaining the balance of the oil market. Yet, it now faces a potential permanent scar caused by the COVID-19 pandemic. Analysts said that demand for fossil-based transportation fuels would peak around 2030. Until then, OPEC will remain important for the world’s energy market. However, some said that OPEC’s relevance might wane off beyond 2040. In the face of its biggest existential threat yet, some OPEC members need to rethink plans to expand in the Asia Pacific region. The region may propel growth in oil demand for the coming years. But the coronavirus pandemic has forced some governments to accelerate the transition toward renewables.
