Low oil prices and the future of OPEC

Low oil prices and the future of OPEC

The prospect that low oil prices may continue in the medium term has important implications for countries whose economies are largely dependent on oil and gas revenues. Economic diversification and trying to limit the decline in oil revenues by increasing the supply appear to be the two most important issues on the agenda of oil exporting countries. 

Diversifying economic activity is not an easy job and it requires long-term planning, the results of which can only be seen after at least a decade. So in the short run, the only way of tackling this new episode of low oil prices is to increase the supply, or at least preserve the current output. In this situation, coordination in OPEC becomes much more difficult and enlarging this cooperation with non-OPEC members becomes almost impossible. 

When oil prices experienced a free fall starting from the second half of 2014, the general expectation from OPEC, as a cartel, was to cut the supply and give a support to prices. However, it has been observed that - as opposed to typical cartel behavior - OPEC has increased its total output during this period. The total OPEC supply was 30.77 million barrels per day in 2014. In 2015, the number increased to 31.85 million barrels per day and it further increased to 32.28 million barrels in February 2016. 

The rise in oil supplies of Iran, Iraq, and Saudi Arabia have been the main driving forces in the increase of OPEC output over the last 18 months. The current trends in oil supplies reveal that Iran and Iraq have the potential to significantly change the dynamics inside OPEC in the long-term. 

According to BP statistics, the total oil reserves of Iran and Iraq are more than 307 billion barrels, which is 15 percent more than the proved oil reserves of Saudi Arabia. 

However, when one looks at the reserve-production ratios, it is seen that the ratios for Iran and Iraq are almost twice that of Saudi Arabia. Considering the recent trend in oil output of Iraq and the lifting of sanctions on Iran, these two countries have the potential to raise their total output to that of Saudi Arabia in the long term. In such an environment, cooperation among OPEC members will become more difficult, and given the reluctance of Saudi Arabia to reduce its oil supply, the position of OPEC as a cartel in oil markets will be in danger. 

Saudi Arabia to be key in future of oil prices

When analyzing the future of OPEC in this new period of low oil prices, one needs to pay a special attention to Saudi Arabia. The country has announced a plan for the initial public offering of its state oil company Aramco and then prepared “Vision 2030,” which documents the strategic perspective of the country in terms of diversifying economic activity. These developments show that Saudi Arabia is trying to adopt the necessary policies that will help it survive in this long-lasting period of low oil prices. The country aims to obtain $100 billion from the public offering of Aramco and the funds that are to going to be raised from here will be used to finance the projects outlined in “Vision 2030.” 

If Saudi Arabia happens to be successful in this plan, it will significantly reduce its dependence on oil and gas revenues. In fact, the country is already making large investments in energy intensive industries, particularly the petrochemicals industry. Therefore, as the dependence on oil revenues goes down, Saudi Arabia will have less of a tendency to take the initiative inside OPEC, and its cartel structure will eventually disappear. 

Assoc. Prof. Fatih Macit is a senior fellow at the Hazar Strategy Institute and head of the economics department and director of the Center of Economic Studies at the Suleyman Shah University.