OPEC is probably the single most powerful organisation in the oil industry, able to influence the price of oil to help its member states; however a review by Bassam Fattouh and Lavan Mahadeva of the Oxford Institute for Energy Studies suggests that whilst OPEC is able to influence prices in the short term, it has less success over the long term.
That leaves the question as to whether OPEC will be able to maintain oil prices of around $110 a barrel for the coming decade or so? The answer … unlikely.
Fattouh and Mahadeva suggest that OPEC only works effectively to “avoid oil prices falling below some level deemed acceptable by its members, rather than to prevent oil prices from rising above certain levels or to set a price ceiling.” In other words it has less power to maintain high oil prices, as it does to prevent low oil prices.
In the 1970’s to 1980’s OPEC managed to greatly increase the price of oil by limiting production and closing down any excess capacity. However this only created a massive financial incentive for alternative producers of oil in Mexico, Alaska, the North Sea, and the US, to hugely increase their own production volumes, as well as work on energy efficiency to reduce their consumption.
OPEC found themselves in trouble as their share of world production fell from 51% in 1973 to 28% in 1985.
It is possible that history could be about to repeat itself, as in response to the high oil prices that OPEC has nurtured since 2002 output is quickly increasing around the world, and new policies in the US and EU are aiming to force deep cuts in the consumption of petrol and diesel.
If OPEC really wants to defend the current price level it will likely have to accept a large reduction in its market share.
By Joao Peixe, Oilprice.com