Since its foundation in 1960, OPEC has had much influence on the oil market and the organization has been able to control the prices of oil in the economic interests of its 12 members. This had led to price of certain oil equities, as well as the commodity itself to have long-term predictability to some extent.
But over the next decade, trends in the U.S. and China will make OPEC irrelevant – or maybe even collapse altogether. A historical high in oil prices since OPEC’s inception has reduced worldwide demand for oil, while oil supply from non-OPEC members is growing at a faster pace than it has in a long time. These events will cause tensions within the organization and lead to an inability for OPEC members to cooperate with each other.
In the 1970s, the U.S., Japan and other developed countries had a huge and growing thirst for oil. This, along with the fact that OPEC members supplied over half the world’s oil gave the cartel the ability to set oil prices. Within the last decade, a demand for oil from emerging markets such as China has led to higher oil prices without any action needed from OPEC. This has also led to a worldwide boom in oil related stocks.
However, a long period of high oil prices has led to declines in U.S. petroleum consumption. Many in the country are changing to natural gas and the fuel efficiency of vehicles is improving even while the United States’ production of oil increases. In fact, oil imports by the U.S. have declined by over 50% since 2005. Demand growth has slowed heavily even in China.
This is happening while non-OPEC oil production is increasing rapidly. The IEA expects non-OPEC supply to increase by 1.8 million barrels per day in 2014, which is far higher than the expected increase of global oil demand. Thus, OPEC has a shrinking share of oil production.
China and U.S. to Make OPEC Irrelevant by 2030
Yet these trends have also masked a decline in the ability of OPEC members to collaborate with each other. Some of the biggest tensions have been between Iran and Saudi Arabia. When global oil prices were nearing $150 during the 2008 economic crisis, Iran blamed Saudi Arabia for boosting production to try and bring prices down.
Indeed, Saudi Arabia is by far the top producer in OPEC and is able to act by itself if it so desires. More than half of OPEC’s 5 million barrel production comes from the country and most of the remainder is from countries such as Iraq, Libya and Iran where oil supply is constrained only by political instability, not an actual desire to cut output.
So, over the next 5-10 years, OPEC countries will be less able to influence prices because of stronger supply outside the organization. At the same time, if oil production rebounds in Iraq, Libya and Iran, cartel members would need to scale production back to avoid an oversupply in the world’s oil market.
The problem is that OPEC seems fragile enough that any attempt to reduce output and cut oil prices may cause a collapse sooner instead of later. Either way, the U.S. and China will make OPEC irrelevant in the near future.
How does this all relate to your investments? These trends indicate an oil boom in certain countries, but a growing irrelevance in others. If you are an investor in oil companies, the ones you choose and where they are from are extremely important.
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