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22 October 2014

OPEC alliance begins to crumble as price of oil plunges

The past few weeks have seen the gradual breakup of the powerful international oil cartel of OPEC, the Organization of the Petroleum Exporting Countries.

Comprised of twelve member-states, OPEC has been extremely influential in the oil industry, controlling prices and supply since its inception in 1960.
The cartel is most notoriously known for its oil embargo on the United States and Western Europe in 1973, in retaliation for support of Israel during the Yom Kippur War, plunging Western countries into an oil crisis and ultimately economic recession, the latter lasting almost a decade.

Since then, OPEC has used oil as both a political and economic weapon, accounting for more than a third of the world’s crude oil supply. But as turmoil burdens the Middle East and challenges political alliances, the cartel’s power begins to fade as dissent grows among its members.

The power of any cartel lies in the discipline and cooperation of all members to collectively set uniform prices and abide by joint decisions. OPEC has been able to function accordingly for over fifty years, but now is succumbing to the plagues that destroy cartels: distrust and disloyalty.

According to Benoît Faucon and Summer Said of The Wall Street Journal, this dissent stems from booming shale oil production in the U.S. and a decreasing demand in Asia due to slow economic growth. The growing non-OPEC supply and lack of demand has sent members racing to garner a share of the recently waning market, and has led to a price war within the cartel.

Saudi Arabia, OPEC’s biggest producer and historic leader, unilaterally lowered its prices for crude oil several weeks ago, without any discussion with other members.

Oil price per barrel in USD

The move lowered the Brent Crude benchmark to $92.31 per barrel, which has continued to slide as low as $80.01 as of October 15th, its lowest level in over two years. Other nations have followed suit and slashed prices in an attempt to undercut cartel members and attract consumers in this disappointing market.
At first glance, the gradual breakup of the historically anti-Western OPEC and the crashing oil prices seem like a blessing to American consumers and the economy. Prices at the tank are dropping, hitting an average of $3.17 a gallon as of October 14th, with experts predicting the fall to continue under $3, according to Russell Gold of the Wall Street Journal.

With a booming crude oil supply from fracking, the historically oil-dependent U.S seems to have entered a new stage of energy consumption. However, the long-term effects of this oversupplied oil market and breakup of OPEC may not be as beneficial to Americans as one might think. The sluggish oil market is exposing the daunting issue of a struggling international economy, and points to bigger problems to come. Oil Saudi Arabia
Many nations, especially those in OPEC, rely on oil exports as a basis of their economy and this slow oil market spells danger for them. As Gold explains, major oil-producer Venezuela is potentially on the verge of an even larger political crisis if exports continue to fall rapidly. Other nations, such as Russia and Iran, fear the same, and with exports falling abroad, the market for imports will contract as well.

The slow-growing American and European economies may face similar trouble, as oil producers lose out on necessary oil-revenue and cut back on imports. At a time where international coalitions are struggling to fight ISIS in the Middle East and Ebola in West Africa, the timing of this downturn of oil prices and overwhelming effect on the international economy threatens stability and success in both efforts.

Not only will this rapidly declining energy market hit economies hard, it threatens the political stability of those nations and may even prevent cooperation and effectiveness in managing global crises.
Although $3 a gallon might make consumers smile at the tank, falling prices may have dire consequences in the long term.