Is OPEC actually as powerful as it seems?

OPEC, often perceived as one of the world’s most powerful institutions, is experiencing a ‘historic move’ according to OPEC president Mohammed Bin Saleh Al-Sada.

For the first time since 2008’s economic crisis, the organization has decided to lower its output of oil. OPEC’s current problem is the overproduction of oil, together with too little demand,leading to even lower oil prices. Now, OPEC has agreed to lessen its production, attempting to drive the prices of oil up again. If this agreement endures, the petrol prices will rise accordingly as well. Interesting to mention is that Russia, which is not a member of OPEC, is of major importance to OPEC’s decisions. Without its support, OPEC’s ‘historic move’ might not have the effect that the organization desires.

The Organization of the Petroleum Exporting Countries (OPEC), consists of 14 nations and was founded in 1960 in Baghdad. According to OPEC, their mission is ‘to coordinate and unify the petroleum policies of its member countries and to ensure the stabilization of oil markets in order to secure an efficient economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.’

OPEC’s main goal is to set up a fixed oil price which is reasonable for both producers and consumers, in order to stabilize the oil market. The collaborating countries engage in meetings if they want to change the price, if for example there is a rise in demand. Although the oil price was expected to stay low because of the slowdown in global demand, OPEC has currently agreed to cut its production.

In order to stabilize the market, the oil cartel now has agreed to decrease the total output by 1.2 million barrels of oil per day. This means the output will be lowered to 32.5 million barrels per day. A ‘historic move’, according to OPEC president Mohammed Bin Saleh Al-Sada. Due to an unexpected agreement between Iraq, Iran and Saudi Arabia this important decision was made, impairing Saudi Arabia the most, with a lowered output of 500.000 barrels per day.

Although these three OPEC members are in agreement, the effectiveness of the deal is very much dependent on non-OPEC members, such as Russia. Whilst Russia has agreed to cooperate and cut its oil production, the two sides will meet within the upcoming weeks. A shift in the oil price is already visible as it grew by over 8% the day after the agreement. Analysts however are skeptical whether the deal will really work out.

Reasons for the skepticism are that OPEC’s members might not stick to their production quotas as their track records are questionable. They could change their mind after all and even fill the production gap which is left by Saudi Arabia. Another issue is that even the lowered production level is still a very high level, providing no intention for the price to go up.

The general image of OPEC is often that it’s a very powerful organization that is capable of adjusting the world’s oil prices to whatever suits it best. However, even though the members of OPEC jointly agreed to cut oil production, there is some reason to be skeptical about the ultimate results of the decision. Non-OPEC members, in particular Russia, individually still have a remarkable influence on the world’s oil market. It seems that not even OPEC, one of the world’s largest and most powerful organizations, can always have it the way they want.

Saskia Mueller-Herbst & Lauri Veltkamp

23-01-2017