There was a time when OPEC could get into the head of an American president. These days, it could use some counseling. Saudi Arabia, one of OPEC’s five founding members and traditionally its dominant voice on policy, has been going it alone, an independent streak that runs counter to the very nature of a cartel. OPEC’s members, which contribute about 40 percent of the world’s supply, are meeting in Vienna with slim prospects for any breakthrough on agreeing to output limits.
1. What’s happening?
The Organization of Petroleum Exporting Countries relies on cooperation from its 13 member countries on production quotas to prevent prolonged periods of oversupply and low prices. In 2014, Saudi Arabia -- the only OPEC member with considerable spare production capacity -- shifted to a policy of putting market share above price stability and oil crashed. An attempt to compromise on an output freeze failed in April when Saudi Arabia insisted that Iran, an OPEC dissident on the matter, must sign on as well. With no agreement, OPEC members continue to pump full blast.
2. What’s driving Saudi policy?
Competition from U.S. shale drilling, political and military rivalry with Iran and demands from its own people for societal reforms have all pressured the Saudi ruling family to shake things up. A new economic plan aims to wean the kingdom off oil revenue by 2030 and calls for partially privatizing the Saudi national oil company, Aramco, which would make it something like the globally active, profit-maximizing giant oil companies OPEC was created to counteract.
3. What role has shale drilling played?
The surge in the global supply of shale oil upset OPEC’s role as a market balancer. Saudi Arabia elected to wage a production battle with shale drillers in the U.S. and other non-OPEC nations, creating the price war that benefited motorists at the pumps. There are signs that the Saudi strategy is working and higher-cost oil producers are getting squeezed.
4. How is this likely to play out?
Saudi Arabia, represented by its first new oil minister in more than 20 years, is expected to use this week’s meeting to mend fences and reassure other OPEC members that it won’t flood the oil market. With oil prices on an extended recovery, though, the Saudi-led plan to maintain production in hopes of squeezing rivals is likely to remain in place.
5. What’s the outlook for OPEC?
“The main take-away from Saudi Vision 2030 is that there’s just no role for OPEC,” said Seth Kleinman, head of European energy research at Citigroup Inc. in London, referring to the Kingdom’s economic plan. “Or, you can have an OPEC without Saudi Arabia, which just isn’t much of an OPEC.”
Still, the death of OPEC has been predicted several times before during periods of low oil prices and it’s always found a way back.
The Reference Shelf
- A Bloomberg QuickTake explainer on how oil prices are set.
- A Bloomberg Gadfly column on Saudi Arabia’s determination to keep on pumping.
- A video on the threat to OPEC’s survival.