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Jun 3, 2013 | 19:25 GMT

3 mins read

OPEC's Declining Influence

Ministers of the OPEC group met in Vienna last week, where they decided to maintain current oil production levels. The cartel faces growing internal divisions and constraints as it struggles to reach a consensus on how to deal with shifts in the global energy market — namely, American growing shale oil production, Russia’s energy pivot to the East and Europe’s economic depression.

The OPEC bloc still accounts for the largest share of global oil production, some 30 million barrels per day. But structural problems within the group, as well as changing patterns of global oil production and consumption, have seriously undermined the ability of the cartel to work as a cohesive entity and act as regulator of global oil prices.

The organization’s greatest strength lies in its ability to affect global oil supply and prices, but years of infighting and intramember conflicts prevent uniform action like the embargoes of the 1970s. In addition, many members of OPEC are weakened by internal economic and political constraints. 

OPEC member states span three continents, but the organization’s hierarchy is dominated by the Persian Gulf countries that produce the most oil. Regional rivalries, especially those between Saudi Arabia and Iran, have led to inaction being par for the course of most organizational meetings.

Saudi Arabia, as the largest producer in OPEC, has pursued unilateral policies that run counter to the interests of members of the group. A powerful example is the Kingdom’s support for sanctions against Iranian crude exports.

In addition to these systemic challenges, OPEC now faces questions about changes in global dynamics in the international energy market. The United States, the world’s largest consumer of oil, has experienced a true oil production revolution. The development of advanced imaging and drilling techniques has enhanced the recovery rates in terminal fields and made vast plays of unconventional hydrocarbons profitable.

Before the so-called shale revolution, oil production in the United States had peaked in the 1970’s (coinciding with the last era of serious OPEC embargoes) and had declined until 2008. In a reversal of its fortunes, the United States now has reached a 20-year high in production volumes, and is forecasted to produce 20 percent more by 2018.

The increase in U.S. domestic oil production has serious implications for some OPEC members that have relied on the United States as a main export market, and threatens to further fragment the already divided organization. Nigeria and Algeria are the two most vulnerable exporters that could see significant fallout from increased U.S. energy independence. They have unsuccessfully pushed for a reduction of production, but could still find alternate export markets.

The disagreement on how to react to the U.S. shale oil revolution underscores the divergence of interests within the group. It seems unlikely that OPEC could take concerted actions to offset any future significant drop in oil prices. This is a dangerous proposition for countries like Iran, Algeria and Venezuela, who depend on high oil prices to subsidize social stability programs. This is in stark contrast with the policy of OPEC’s largest producer — Saudi Arabia — who prioritizes volume over price.

 Without an agreement in sight on how to manage an increase in global unconventional energy production, including the United States' shale oil boom, the Vienna OPEC summit was as divisive as it was ineffectual.

OPEC's Declining Influence
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