OPEC Quota Deal Failed, Time to Move On

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When OPEC nations and their allies meet again on Friday, a certain reckoning will be long overdue –  that in their refusal to acknowledge the dexterity of North American shale players, they have committed one of two equally arrogant, short-sighted things sins. Whether these nations overestimated their influence on global markets or underestimated the impulsiveness of North American shale players, the net effect is the same.

OPEC, Russia and the rest have failed.

Ostensibly intended to push an off-kilter supply/demand ratio toward balance – drive global crude oil prices well above the low-$40s average in 2016 – these oil-rich nations agreed last year to cut their crude production by 1.8 million barrels during the first half of the year. The rare accord in November had the immediate effect of pushing prices above $50 per barrel for the first time in more than a year. And, in subsequent months, analysts have congratulated the countries for following through on their pledge with 85 percent compliance. But the net effect has been uninspired. During the first six months of 2017, global oil prices limped forward and managed to sustain 7 percent growth, roughly averaging $46.04 per barrel.

And so when OPEC and its allies gathered again in Vienna in May to extend the quotas, the market generally responded with a yawn. The key players in the OPEC/non-OPEC accord – Saudi Arabia and Russia – largely depend on oil revenue to sustain their governmental functions. What’s more, Saudi’s national oil company, Saudi Aramco, is shopping its initial public offering around the world’s markets; the better the oil price, the more viable the business model.

But as the Sept. 22 date nears, it should become increasingly clear to these large, powerful nations steeped in old world tradition. In the modern world in which United States’ wildcatters have a shot to make a buck and pull themselves up higher by their proverbial bootstraps, manifesting a reality from sheer will – even that of some of world’s mightiest nations – is tougher than it might seem.

It’s fair to say when the OPEC/NOPEC efforts materialized in some crude supply decline and hinted that prices would appropriately rise, US producers flipped the switch to kick up their production and capitalize on that austerity. After all, the shale revolution wasn’t brought to life by a lack of self-interest. The expectation that capitalists would bow when crude revenue is at stake is at best a quaint notion and at worst, simple ignorance. In short, the Middle East’s oil barons abdicated that influence when they refused to recognize the potential of US ingenuity to develop its tightest rock resources.

That OPEC/NOPEC will make yet another effort to manipulate the market with another extension isn’t a foregone conclusion. Some speculate the rumors of action are being ferreted out simply to prop up commodity prices in advance of the coming meeting. Others suggest that for such action to have a real impact, deeper cuts would be necessary, and that would require the buy-in of countries that include Iraq – an unlikely proposition. And history tells us that the longer cuts and rumors of cuts carry on, the more opportunity exists for member nations to fall off the rolls, crumbling the fragile coalition.

Is there anything a mighty nation and its allies can do to manage, shape – or even, control – global commodity markets? Short of finding a time machine, these leaders must finally embrace the modern era of a global economy in which more power exists, but it’s dispersed among more players.

 

To share your thoughts on this issue, please feel free to contact GEM board member Deon Daugherty at deondaugherty@gmail.com