OPEC meeting shows it is playing long game
2. OPEC is strong
The final question from reporters at the press conference asked if OPEC’s failure to agree on price ceilings indicated that OPEC was no longer strong.
In response, OPEC Secretary General Abdallah Salem el-Badri said, “No, OPEC is stronger than ever.” Reports of OPEC’s demise are not just premature; they are baseless. Many analysts claim that OPEC must have lost its power because it is not manipulating oil prices in the direction they predicted. In other words, analysts who mistakenly expect OPEC to want immediate high prices through production cuts can only attribute the failure to some weakness.
In fact, OPEC is quite strong, as el-Badri said. Here is why:
1. OPEC nations control over 80% of the world’s proven oil reserves, even though they pump conservatively and currently provide only 35-40% of the oil on the market.
2. In general, it costs OPEC countries much less to extract their oil than it costs non-OPEC producers.
3. OPEC countries operate their own national oil companies, meaning they enjoy monopolies on resources within their borders, have the strength of the government behind them, and do not have to answer to shareholders and the short-term whims of shareholders.
4. OPEC can operate as a cartel when it chooses, whereas many non-OPEC producers are prevented from doing so by anti-trust laws.
A sign of OPEC’s continued strength and relevance is Indonesia’s decision to rejoin OPEC this December. Indonesia is not a net oil exporter but is seeking investment from foreign sources to further develop its crude oil and refining industries. Rejoining OPEC provides Indonesia with access to well capitalized national companies looking to make investments, key data about the oil market, and a group of like-minded and successful national oil companies to connect with.
Whereas once OPEC countries turned to the U.S. and U.K. to help exploit their resources, now countries turn to OPEC.
Image via Reuters