Organization of Petroleum Exporting Countries (OPEC) is a permanent, intergovernmentalOrganization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabiaand Venezuela.
The five Founding Members were later joined by nine other Members Qatar,Indonesia, UAE, Libya, Algeria, Nigeria, Gabon and Angola. OPEC as an organization holds 81per cent of the total oil reserves. The fundamental objective of the organization is to co-ordinate& unify the petroleum policy of the member countries, to determine the best means forsafeguarding their individual and collective interests and to ensure price stability in internationaloil market. The rise of non-OPEC countries like Russia have transformed the rules in the worldoil market, which OPEC once dominated.The present world is very different to the one OPEC faced years ago. There has beentechnological advancement which has changed almost everything that touches us in our day-todaylife and there has been rise in the global energy consumption as well. The Shale oilextraction is done with the help of hydraulic fracturing commonly known as fracking, and thishas facilitated US to move on its path of energy independence.
This technique was developed in1970’s, but in recent times advancement in fracking has made the investment in Shale oileconomically viable. The enhancement of fracking technology, has declined the market share ofOPEC. The coming of more producers in the market has increased the non-OPEC supply growthand brought market to more competitive and stable pricing conditions, thus abandoning the oilpricing system in mid-1980’s and moved to market based pricing system. In order to keep theprice target range in the condition when the global oil demand declines, the OPEC woulddecrease production. These decisions are dependent on the coordination efforts and bargainingpower of OPEC member countries.The shale industry has been evolving rapidly.
The rise in shale oil production has been becauseof technological advancements that have made the exploration and exploitation of oil moreaffordable. In a situation of low oil prices and expensive technology to extract oil, shale oilproduction makes no economic sense but since the price of oil before 2014 were high itencouraged them to explore and produce more oil as it would be profitable. In 2012, the EIAprojected that the US would become the world’s leading crude oil producer, overtaking SaudiArabia in the coming years. In March 2014, US produced 8.2 million barrel per day (mbd) andimported an additional 7.
3 mbd to meet its oil needs. The ban over the US crude exports was 3revoked in 2015 and this provided the market for the light, sweet crude pumped out of America’sshale deposits which would eventually give the fracking industry a stimulus. The shale boom hasincreased oil production in America by almost 75 per cent from 2010-15 and has simultaneouslydecreased its energy security concerns which moved around oil imports.
The U.S. postedconsecutive years of declining imports, falling to an average of 9 mb/d in 2010, then to 8.8 mb/d(2011), 8.
6 mb/d (2012), 7.8 mb/d (2013) 7.4 mb/d (2014), and finally dropping to 7.3 mb/d in2015, the lowest level of imports in at least two decades.
In June 2014, oil prices saw a moderate decline. The drop in price of oil in 2014-15 hasresemblance to the years 1985–86 wherein there was expansion of oil supply from North Sea andGulf of Mexico in 1970’s and early 80’s. These two together added more oil to the globalmarket. In response, OPEC changed its policy by abandoning price targeting and began toincrease production due to which price collapsed and remained low for almost two decades. The1980s and 1990s saw oil supply disruption associated with the outbreak of the Iran-Iraq War, theAsian crisis (1997-98); the global financial crisis (2008-09) and the crisis because of ArabUprising (2011-12).
The latest one (June 2014-January 2015) constitutes another price drop.Despite the fall in the price of oil, the OPEC members in their meeting on 27th November 2014announced that there would be no production cut. This action of OPEC had happened in thebackdrop of weakening global demand and several years of steadily rising capacity from nonOPECsource. The decision had caused the oil prices to fall to $50 from over $100 per bbl in aspan of two months. The decline between June 2014 and January 2015 was one of the largest.The rentier nature of the OPEC members has essentially added to the problem. The revenue ofthese economies were hurt as a result of such low prices and the economic growth that wasreliant on them had been jeopardized. According to EIA (2016) report, OPEC’s earning droppedto $404 billion in 2015, a 46 per cent decline from $753 billion earned in 2014.
As a result, theprice collapse also led to introduction of policies like taxation and diversification.The low prices have not driven out the non-conventional producers from oil market. U.S. shaleoil producers have expanded production and has been resilient to price swings.
The productioncosts have fallen significantly as the industry has evolved. In December 2015, following a yearof low oil prices, OPEC decided to continue production as before despite the falling price andremained committed to market share strategy. In order to reduce global oversupply OPEC and 4non-OPEC reached an agreement in 2016 to curtail output. While, OPEC agreed to slash itsoutput by 1.2 mb/d in 2016, non – OPEC Russia agreed to slash output by 300,000 b/d.The agreement reached in 2016 showed a reversal in policy adopted by OPEC in 2014 when itdecided to increase production to drive out the higher cost shale from the market but it had notbeen fully successful. Though the production at some places declined and became difficult tocompete with low cost producers from OPEC.
At such low prices shale was not able to makeprofits while OPEC members still made small profits. The production efficiency at some placeslike North Dakota and Texas enabled it to reduce the average cost of production from $80 USper barrel to an average of $40 US per barrel. In November 2017 the OPEC members would bemeeting to discuss whether shale companies can put a cap on its production.The Shale revolution is widely considered to be the main driver of price developments since2014. The market share strategy rather than revenue maximization becomes relatively moresignificant for OPEC as these countries have huge reserve of oil which they export to earnrevenue. There had been steady rise in the volume of shale oil, efficiency gain in technology andat the same time there was very less growth in demand for oil when OPEC made its decision tocontinue producing oil as before rather than reducing it.
As a result the prices fell from above$100 US to an average of $50 US since 2014, the rentier OPEC economies were the principlesufferers. The ability of OPEC to influence the oil market would be tested in the face ofexpanding Shale industry. The following research will give an account of OPEC’s strategic shiftin policy post 2014 to contain non-OPEC Shale.