Organization on the coordination efforts and bargaining power

Organization of Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental
Organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia
and Venezuela. The five Founding Members were later joined by nine other Members Qatar,
Indonesia, UAE, Libya, Algeria, Nigeria, Gabon and Angola. OPEC as an organization holds 81
per cent of the total oil reserves. The fundamental objective of the organization is to co-ordinate
& unify the petroleum policy of the member countries, to determine the best means for
safeguarding their individual and collective interests and to ensure price stability in international
oil market. The rise of non-OPEC countries like Russia have transformed the rules in the world
oil market, which OPEC once dominated.
The present world is very different to the one OPEC faced years ago. There has been
technological advancement which has changed almost everything that touches us in our day-today
life and there has been rise in the global energy consumption as well. The Shale oil
extraction is done with the help of hydraulic fracturing commonly known as fracking, and this
has facilitated US to move on its path of energy independence. This technique was developed in
1970’s, but in recent times advancement in fracking has made the investment in Shale oil
economically viable. The enhancement of fracking technology, has declined the market share of
OPEC. The coming of more producers in the market has increased the non-OPEC supply growth
and brought market to more competitive and stable pricing conditions, thus abandoning the oil
pricing system in mid-1980’s and moved to market based pricing system. In order to keep the
price target range in the condition when the global oil demand declines, the OPEC would
decrease production. These decisions are dependent on the coordination efforts and bargaining
power of OPEC member countries.
The shale industry has been evolving rapidly. The rise in shale oil production has been because
of technological advancements that have made the exploration and exploitation of oil more
affordable. In a situation of low oil prices and expensive technology to extract oil, shale oil
production makes no economic sense but since the price of oil before 2014 were high it
encouraged them to explore and produce more oil as it would be profitable. In 2012, the EIA
projected that the US would become the world’s leading crude oil producer, overtaking Saudi
Arabia in the coming years. In March 2014, US produced 8.2 million barrel per day (mbd) and
imported an additional 7.3 mbd to meet its oil needs. The ban over the US crude exports was
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revoked in 2015 and this provided the market for the light, sweet crude pumped out of America’s
shale deposits which would eventually give the fracking industry a stimulus. The shale boom has
increased oil production in America by almost 75 per cent from 2010-15 and has simultaneously
decreased its energy security concerns which moved around oil imports. The U.S. posted
consecutive years of declining imports, falling to an average of 9 mb/d in 2010, then to 8.8 mb/d
(2011), 8.6 mb/d (2012), 7.8 mb/d (2013) 7.4 mb/d (2014), and finally dropping to 7.3 mb/d in
2015, the lowest level of imports in at least two decades.
In June 2014, oil prices saw a moderate decline. The drop in price of oil in 2014-15 has
resemblance to the years 1985–86 wherein there was expansion of oil supply from North Sea and
Gulf of Mexico in 1970’s and early 80’s. These two together added more oil to the global
market. In response, OPEC changed its policy by abandoning price targeting and began to
increase production due to which price collapsed and remained low for almost two decades. The
1980s and 1990s saw oil supply disruption associated with the outbreak of the Iran-Iraq War, the
Asian crisis (1997-98); the global financial crisis (2008-09) and the crisis because of Arab
Uprising (2011-12). The latest one (June 2014-January 2015) constitutes another price drop.
Despite the fall in the price of oil, the OPEC members in their meeting on 27th November 2014
announced that there would be no production cut. This action of OPEC had happened in the
backdrop of weakening global demand and several years of steadily rising capacity from nonOPEC
source. The decision had caused the oil prices to fall to $50 from over $100 per bbl in a
span of two months. The decline between June 2014 and January 2015 was one of the largest.
The rentier nature of the OPEC members has essentially added to the problem. The revenue of
these economies were hurt as a result of such low prices and the economic growth that was
reliant on them had been jeopardized. According to EIA (2016) report, OPEC’s earning dropped
to $404 billion in 2015, a 46 per cent decline from $753 billion earned in 2014. As a result, the
price collapse also led to introduction of policies like taxation and diversification.
The low prices have not driven out the non-conventional producers from oil market. U.S. shale
oil producers have expanded production and has been resilient to price swings. The production
costs have fallen significantly as the industry has evolved. In December 2015, following a year
of low oil prices, OPEC decided to continue production as before despite the falling price and
remained committed to market share strategy. In order to reduce global oversupply OPEC and
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non-OPEC reached an agreement in 2016 to curtail output. While, OPEC agreed to slash its
output by 1.2 mb/d in 2016, non – OPEC Russia agreed to slash output by 300,000 b/d.
The agreement reached in 2016 showed a reversal in policy adopted by OPEC in 2014 when it
decided to increase production to drive out the higher cost shale from the market but it had not
been fully successful. Though the production at some places declined and became difficult to
compete with low cost producers from OPEC. At such low prices shale was not able to make
profits while OPEC members still made small profits. The production efficiency at some places
like North Dakota and Texas enabled it to reduce the average cost of production from $80 US
per barrel to an average of $40 US per barrel. In November 2017 the OPEC members would be
meeting to discuss whether shale companies can put a cap on its production.
The Shale revolution is widely considered to be the main driver of price developments since
2014. The market share strategy rather than revenue maximization becomes relatively more
significant for OPEC as these countries have huge reserve of oil which they export to earn
revenue. There had been steady rise in the volume of shale oil, efficiency gain in technology and
at the same time there was very less growth in demand for oil when OPEC made its decision to
continue producing oil as before rather than reducing it. As a result the prices fell from above
$100 US to an average of $50 US since 2014, the rentier OPEC economies were the principle
sufferers. The ability of OPEC to influence the oil market would be tested in the face of
expanding Shale industry. The following research will give an account of OPEC’s strategic shift
in policy post 2014 to contain non-OPEC Shale.