OPEC Cartel: 3 Reasons it Still Matters

As the June 2 OPEC meeting approaches, the big question oil watchers are asking is, “Does the OPEC cartel still matter?” The answer, however unpopular, is, “yes, OPEC still matters.” Here’s why:

1) OPEC is still a cartel, even if it isn’t acting like a cartel right now.

The OPEC cartel usually operates by setting oil production quotas for each member at rates that are designed to keep prices at a certain level. Just because OPEC is now not choosing to enforce quotas does not mean that the organization cannot—or will not—change in the future. In fact, OPEC has refrained from using its power on previous occasions. The organization was formed in 1960, but it did not use the considerable power it commanded over oil resources to force price increases for thirteen years. Fundamentally, the cartel still controls 81% of the world’s oil resources, so when OPEC’s most powerful members (currently Saudi Arabia) finally decide to cut oil production, other, less powerful OPEC nations will be willing and eager to comply.

2) Weaker OPEC nations can’t afford to abandon the cartel.

Economically weak and inefficient OPEC nations need high prices more than stronger OPEC nations do. Weak OPEC countries lack cash reserves and, in many cases, cannot keep up with unlimited oil production. Venezuela, for example, is a weak producer even though it sits on the largest proven crude oil reserves on the planet. The economic calamity caused by low oil prices has even caused the nation’s production to decline. Venezuela vehemently opposes Saudi Arabia’s free-for-all production policy but lacks the economic leverage to fight it. Still, its weakness and desperation make it impossible for Venezuela to abandon the OPEC cartel. Venezuela (along with Algeria, Nigeria, Libya, Ecuador, and Iran) may hate OPEC’s current policy, but it has no option. It must wait for OPEC to change policy, because its production power means nothing without Saudi Arabia’s clout in the global market.

3) Worse disagreements have happened.

Historically, OPEC has been rife with disputes over oil production levels and prices. Outwardly, OPEC seemed united in its decision to unilaterally cut oil production and raise prices from 1973 through 1979, but OPEC nations actually fought viciously over these matters. In 1975, in fact, Saudi Arabia wanted to lower prices slightly, whereas Iran pushed for a 35% price hike. During the meeting, Saudi Arabia pressured other nations not to support Iran. The Saudis threatened to use their production capacity to push oil prices down on their own. In the end, OPEC compromised on a 10% price increase. Historically, Saudi Arabia and Iran have disagreed often. Yet these disagreements have never split the cartel and will not end it now, because OPEC is more powerful together than its nations could ever hope to be on their own.

Maybe the best indication that OPEC still matters is that anyone who follows the oil industry and oil prices will be watching on Wednesday, even though everyone believes OPEC will maintain the status quo. When (or if) OPEC announces its intention to maintain production levels without quotas, prices will be impacted.

Remember, OPEC and its policies are the primary cause of the massive price fluctuations in oil we have seen over the past few years. OPEC was the reason we had $100/barrel oil in 2014, and OPEC is the reason oil was valued at one-third that price in 2015. What we are all looking for is what oil will be priced at for the rest of 2016.