There was a brief, fleeting moment 45 years ago when OPEC seemed to rule the world. As the Yom Kippur War was raging, the cartel’s Arab member states imposed an oil embargo on the United States and a handful of other countries, seeking to pressure them on Israel. Long lines formed at gas stations and petroleum prices quadrupled. The world economy sank into recession, but OPEC countries now enjoyed wealthy once only imagined.
Flash-forward to this week and things look very different. The Organization of the Petroleum Exporting Countries has become so irrelevant that Qatar – one of its oldest members – announced it would quit next month, simply because it didn’t think membership was worth the trouble.
As oil powers go, Qatar is a minor player. Its share of crude oil reserves is just 2.1 percent of the OPEC total, and its production is just 5 percent of the Saudi level. The hydrocarbon that has made Qatar its fortune – and pays for such babbles as the Al Jazeera news network and suitcases bound for Gaza, stuffed with millions in cash – is natural gas. It is the world’s biggest producer of liquefied natural gas and has plans to ramp up output even more.
If Energy Affairs Minister Saad al-Kaabi is to be taken at his word, Qatar would rather focus on its natural gas. But Kaabi’s explanation sounds less than authentic. There’s no reason why Qatar can’t belong to OPEC and accept its dictates, and happily export however much gas it wants – because gas isn’t part of OPEC’s mandate.
Kaabi said the decision isn’t tied up with Gulf politics and the embargo Saudi Arabia has imposed on it since June 2017. But that also sounds less than authentic. Saudi Arabia is an oil power in its own right, but its status is enhanced immeasurably by being a founder and leader of the storied cartel. It’s fair to assume that the Qataris don’t mind the loss of Saudi prestige that their exiting OPEC creates. Since they are a second-string member of the oil cartel, they lose very little in the process.
The reality is that, even at the peak of its power, OPEC was never the cartel it was cracked up to be. The 1973 embargo spread panic at the time and aroused fears that the world balance of power was shifting to the Middle East.
But in fact, not all OPEC members adhered to the embargo (just its Arab ones), and the demand that Israel withdraw to the 1949 armistice lines led nowhere.
The embargo’s success had more to do with the world supply and demand balance at the time. American oil production had been falling for some time and its reliance on imports was growing. It had little spare capacity, so when the embargo came the world was unprepared.
There’s a good reason OPEC has never tried to impose an embargo like that again. The wealth generated from higher oil prices meant many of its members found they had a stake in the world economy. Causing global economic slowdowns undermines the demand for energy and reduces the value of their investments in Europe and America. The cartel now prefers to be seen as a responsible world citizen that doesn’t engage in politics.
In any event, the organization’s ability to manipulate prices is extremely limited. It may produce 60 percent of the world’s internationally traded oil, but OPEC oil isn’t the only energy in town. Every time the price of oil gets too high, market forces kick in to adjust demand and bring it down. Oil-consuming countries develop their own petroleum resources, rely more on renewables and, more than anything else, they conserve energy.
Pushing prices lower to keep out the competition doesn’t work in the long run. That’s because OPEC members desperately need their oil revenues to fund generous government programs that keep their populations content and their economies running, in lieu of any other competitive industries. Even the legendarily wealthy Saudis borrowed $17.5 billion in international capital markets two years ago because they couldn’t risk cutting spending after oil prices crashed.
In any case, to be a successful cartel your members have to show discipline and unity of purpose. OPEC has never enjoyed either. It’s difficult to monitor oil output and there are no ways of effectively enforcing quotas, so members are tempted to cheat. OPEC's membership is too disparate and often at odds with each other – witness the warfare between the Saudis and Iran. The Saudis are prepared to pump more of their oil to ensure the world needs less Iranian petroleum. The Iranians regard that as muscling in on their quota.
Many of its members are in such political disarray, they couldn’t manage their supply even if they wanted to. Thus, when OPEC agreed in 2016 to reduce supply to lift prices – its members' first such pact in 15 years – the strategy seemingly worked. Except that it was no strategy at all: Through the immense incompetence of its government, Venezuela couldn’t stop a freefall of its oil production. Voila, much of the quota was met by default. The rest was covered by problems in Iran and Libya.
The future for oil – and therefore of OPEC – looks no brighter than in the past. In contrast to 1973, U.S. oil production has risen rapidly and America is now the world’s largest producer. Electric cars and renewable energy are on the rise, regardless of what Donald Trump thinks.
Even the Saudis understand that the good times are coming to an end. When he isn’t dismembering opposition journalists, Crown Prince Mohammed bin Salman is working feverishly to build an economy for his kingdom that doesn’t rely on oil. Little doubt he's looking at Qatar's OPEC exit as a slap in the face. But the truth is it's no less an admission of the oil reality than MBS' plans for Saudi Arabia.
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