The Organization of the Petroleum Exporting Countries (OPEC) will hold its next ministerial meeting Thursday in Vienna. Expect much ado about nothing.
With Saudi Arabia and Iran locked in continuing geopolitical rivalry, OPEC probably won’t come to an agreement to change its oil output targets. Even if it does, however, history suggests that such agreements are largely pointless.
Some OPEC members, such as Algeria, Iraq and Venezuela, will want the organization to do what cartels do: constrain supplies and raise the world price of oil. But OPEC won’t meaningfully reduce oil supplies. It can’t. The organization has no way of enforcing the collective cooperation necessary to move the markets.
In a detailed analysis of OPEC’s behavior since 1982, I found that OPEC imposes no meaningful constraints on its members’ rate of oil production. Consequently, it does not really affect prices. By definition, a real cartel creates agreements about how much each member will produce, in order to restrict overall production and thereby increase prices. OPEC used to assign production quotas for its members, creating the appearance of a cartel, but stopped in 2012.
The evidence shows that OPEC does not act like a cartel, and hasn’t for decades. It cheated on its own aggregate production target a whopping 96 percent of the time. As if that wasn’t bad enough, OPEC members didn’t even change production following changes in their OPEC production targets. And if OPEC were a true cartel, members would generally produce oil at a lower average rate, all else equal, than non-members. But in OPEC, they don’t. Any of these findings would cast doubt on OPEC’s status as a cartel; collectively they are pretty conclusive. In fact, research by Erik Voeten and Michael Ross suggests that oil producers are pretty bad at international cooperation, generally.
There are a couple of new wrinkles at this upcoming meeting, however. Saudi Arabia has a new oil minister, Khalid al-Falih, who replaces the long-serving Ali al-Naimi. Al-Naimi was minister for more than 20 years, so his successor is being closely watched. There is some question how much independence the new minister has from the powerful Deputy Crown Prince Mohammed bin Salman. And the Saudis are bound to be displeased by the recent White House decision to allow Iran to export more oil. But while the future of Saudi oil policy is uncertain, we can be confident that OPEC will be superfluous to it.
Indonesia will be back as a full member at OPEC, having been reinstated at the last meeting in December after a seven-year hiatus. That move brought the farcical nature of the “cartel” to the fore: Indonesia is not a net exporter of oil, so it doesn’t even meet the basic criteria for membership implicit in OPEC’s name. Indonesia produces about 800,000 barrels per day but consumes twice that amount domestically. Still, if we understand OPEC as a political club, not a cartel, its decision to readmit Indonesia makes perfect sense: Indonesia wants the networking opportunities at OPEC meetings to access Persian Gulf business ventures. And OPEC wants Indonesia as a member, because a larger membership creates the appearance of a stronger organization. The fact that Indonesia does not export (on net) is almost beside the point.
Low oil prices in the past two years have had real geopolitical consequences. But with oil back near $50 per barrel, up almost 70 percent since January, not every OPEC producer is equal. The high-cost producers, such as Venezuela, Angola, Nigeria and Indonesia, are unlikely to invest in new production. Over time, their output will decline, contributing to a new bust-boom cycle.
Other members, such as Kuwait, Saudi Arabia and the United Arab Emirates are low-cost producers. They have more options and could even increase output if they wanted. Slightly higher prospects for meaningful climate change policies, in the wake of the Paris agreement, might encourage them to pump more oil in the short term before it loses some of its value in the long run.
Increasingly, the main split in the global oil market is not between OPEC and non-OPEC producers, it’s between high- and low-cost producers. Interestingly, the United States’ position has changed dramatically in the last few years, with the cost of its marginal barrel of oil produced falling significantly. The real consequences of low oil prices are still playing out in the tight U.S. oil industry, but it looks like much of the industry can stay in business at $50 per barrel.
And the Islamic State is inadvertently doing oil producers around the world a favor. Wherever Islamic State fighters operate – whether it’s in Syria, Iraq or Libya – the oil industry goes into decline. This is partly because the Islamic State itself is terrible at running oil wells, but also because the United States and others target its operations for bombing. By constricting oil supplies, the Islamic State is inadvertently putting upward pressure on world prices.
So OPEC meets during interesting times (though that’s almost always the case). Change is the one constant in the global oil industry. But as the evidence mounts that OPEC is not in charge of global prices, U.S. policymakers can safely ignore the meeting in Vienna.
Jeff Colgan is the Richard Holbrooke Assistant Professor of Political Science and International Affairs at Brown University. He is @JeffDColgan on Twitter.