The Rising Production of Oil by Non-OPEC Countries is the Biggest Threat to OPEC’s Power

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Table of Contents

Introduction
Non-cooperation among OPEC Members
Innovation and Technology Issues by OPEC Members
Non-OPEC Countries taking over the Role of Swing Oil Producer and Price Marker
Conclusion
Reference List

Introduction

Since its establishment in 1960, the Organization of Oil Exporting Countries (OPEC) has dominated the global oil markets and prices. However, the rising production of oil by non-OPEC countries has become the biggest threat to OPEC’s power. The powerful OPEC was established to safeguard the interest of member oil exporters, a role that the organization had managed to sustain until recently when its market share declined from over 50% to 40%.

Oil extraction by non-OPEC countries has been on the rise until the recent mid-2014 fall in oil prices. Countries such as the US have intensified their oil extraction in the shale fields. Russia has also increased its oil extraction to the extent of becoming a major non-OPEC oil producer.

As the paper confirms, the increase in oil production by non-OPEC countries has led to the witnessed non-cooperation among OPEC members, disparity in technology and innovation between OPEC and non-OPEC countries, and the issue of non-OPEC countries taking over the role of swing oil producer and price marker, and hence the biggest threat to the power of OPEC.

Non-cooperation among OPEC Members

The increased production of oil by non-OPEC countries has resulted in reduced oil prices across the globe. According to Yergin (2006), the power of OPEC has been sourced from its ability to regulate oil prices in the world markets by managing the supply and access of oil by other countries.

Birol (2007) affirms that the mechanism that OPEC used to cling to this power as a cartel was the cutback in oil production by the dominant Saudi Arabia if oil prices went down. According to Guidi, Russell, and Tarbert (2006), Saudi Arabia accounts for approximately a fifth of all the oil reserves in the world.

A cut down in its oil production means low supply in the market. Hence, the demand for oil goes up, followed by price increment, which in turn results in high asset prices in the US and other OPEC countries (Ahmadian, Hassan, & Regassa, 2013). Since Saudi Arabia accounts for more than half of all the OPEC oil reserve capacity, it acts as the swing producer and regulator of oil prices (Portman, 2007; Guidi et al., 2006). Hence, it can reduce its oil production to raise prices.

However, this trend has been threatened by the recent increase in oil production by non-OPEC countries. For instance, Braml (2007) observes that an increase in oil production by non-OPEC countries has resulted in increased oil supply in the market, hence reducing oil prices. Therefore, OPEC members have called for meetings to deliberate on their position concerning the falling world oil prices.

However, the meetings have ended in disarray after members fail to agree. OPEC remains a divided organization, owing to competition from non-OPEC countries in terms of oil prices (Birol, 2007). For instance, OPEC members within the Gulf Cooperation Council (GCC) that include countries such as Qatar, Kuwait, the UAE, and Saudi Arabia have been willing to let world oil prices fall for them to increase their market share in the world.

On the other hand, member countries of OPEC such as Venezuela and Iran have opposed the policy that allows oil prices to fall. They have advocated higher oil prices in the world markets (Mann, 2012). Such countries have also advocated lower oil production, which is opposed to the GCC OPEC members. This deadlock within OPEC saw the November 2014 summit unsuccessful.

The impact of the increased threat to the power of OPEC because of the amplified oil production by non-OPEC members became more evident when Saudi Arabia declined to reduce its oil production alone unless other oil producers such as Russia (a non-OPEC member) also reduce their production.

Ahmadian et al. (2013) confirm how such intimidation to the OPEC members threatens to split its power and make oil prices shift in terms of regulation. For example, immediately after the failed November 2014 OPEC summit, oil prices fell rapidly (Colgan, 2014). The power to control oil prices is slowly slipping away from the OPEC since Saudi Arabia is even more likely to flood oil markets with cheaper supplies to increase its market share and/or maintain its old markets.

Morse and Richard (2002) maintain that OPEC fears that the increased oil supply from non-OPEC countries such as Russia, Canada, and the US will take over the market with lower prices. The increase in oil production from non-OPEC countries has threatened the power of OPEC members by putting the interest of individual countries such as Qatar, Saudi Arabia, Kuwait, and the UAE ahead of that of OPEC as a body (Webb, 2013).

Innovation and Technology Issues by OPEC Members

Apart from having the highest oil reserves, Saudi Arabia (a dominant member of OPEC) also has the cheapest oil production technology (Yergin, 2006). This situation, which seems to have worked to the advantage of the other 12 member countries in the OPEC since Saudi Arabia is the leader, has led to the adoption of even cheaper expertise by non-OPEC members.

Birol (2007) observes that through its cheap production cost, Saudi Arabia has managed to regulate oil supply in the world market since it shields the other members to maximize their profits.

However, the increase in oil production by non-OPEC countries is a threat to the existence of this dominant power system. For instance, Braml (2007) asserts that both the US and Canada have employed cheaper technologies in their extraction of oil in the recent past. Since oil prices have been high until mid-2014, these countries have also managed to supply oil to the world markets at lower prices compared to those floated by OPEC members.

As a result, OPEC members have no choice but to reduce their oil prices in the world market to secure their traditional markets and/or increase their business share (Dullieux, Ragot, & Schubert, 2011). Mann (2012) observes that the efforts to maintain the OPEC member countries’ markets have ended up in more splits than unity in the organization as their market domination powers are threatened.

The only way to save the decline of OPEC power will be through increased oil production by countries that have higher oil reserves such as Saudi Arabia and/or reducing oil to out-win the non-OPEC oil producers (Guidi et al., 2006). Critics such as Braml (2007) argue that this move will work only if the cost of production of oil by non-OPEC countries such as Russia, the US, and Canada is higher than the market prices floated by OPEC members, including Saudi Arabia, Qatar, Kuwait, and the UAE.

However, Colgan (2014) observes that although a reduction in oil extraction activities was witnessed after November 2014 when OPEC summit failed to reach an amicable solution to the falling oil prices, modern technology seems to maintain oil production by non-OPEC members afloat.

Non-OPEC countries, for instance, the US, Canada, and Russia have used modern technology in their extraction of oil (Morse & Richard, 2002). Innovation and the increased technological expertise have made the extraction of oil in non-OPEC countries more efficient and cheaper (Guidi et al., 2006).

This situation has threatened the OPEC markets even more. For instance, Saudi Arabia has vowed not to reduce its oil supply in the world market, unless non-OPEC countries such as Russia also reduce their supply formation. This case illustrates that the efficiency of oil production is a threat to the power and existence of OPEC.

The use of innovative technology by non-OPEC countries in oil extraction and production means that major non-OPEC oil producers such as Russia will take over global oil markets that were traditionally dominated by OPEC members (Siddiqi, 2002). The existence of countries such as Venezuela and Iran in the OPEC is pegged on the benefits of being safeguarded by dominant members, including Saudi Arabia, in oil export (Ahmadian et al., 2013).

The fact that Saudi Arabia, which has been the dominant market swinger and dominant regulator, is opting out of its traditional role in OPEC is a threat to its power. Instead of cutting back its oil supply to raise oil prices, the country has opted to increase its oil supply to the global markets with the view of securing and increasing its market share.

This case will leave smaller OPEC members exposed to global competition for oil markets with major producers in the non-OPEC countries such as Russia. Portman (2007) asserts that the cost of oil extraction and production has been very high.

Countries have opted to let states with high oil reserves such as Saudi Arabia and the UAE supply them with oil. However, Yergin (2006) affirms that modern technology and innovation in oil extraction has made it cheaper and more efficient. Therefore, the power of OPEC in dominating world oil prices is likely to be split or worse still taken over by non-OPEC countries.

Non-OPEC Countries taking over the Role of Swing Oil Producer and Price Marker

An OPEC member, namely Saudi Arabia, has dominated the role of price marker and swing producer (Siddiqi, 2002). Saudi Arabia has managed to play this role, owing to its large oil reserves and its willingness to preserve the reserves for future generations. Saudi Arabia has kept world oil prices high through limiting its output (Birol, 2007).

Since it has huge reserves, it has set prices that are followed by the other small members, thus enabling them to maximize their profit through their output at a given price. Since OPEC has failed to set limits on output per member country, most of the smaller countries take advantage and produce above the quotas allocated in an effort to make more profits.

Saudi Arabia has also used its large oil reserve that has been spared over the years for the prosperity of future generations as a way of controlling oil prices (Colgan, 2014). For instance, it voluntarily limits its output of oil to the world markets with an aim of saving it for the future generations.

However, this privilege of being the market swinger is threatened by the increased oil production by non-OPEC countries. Although dominant countries such as Saudi Arabia, the UAE, and Kuwait have no need for immediate revenue that comes from high prices of oil, their market share has been threatened. Citing a similar occurrence in 1986, critics of this school of thought such as Ahmadian et al. (2013) have argued that the increased oil production by non-OPEC countries is not a threat to OPEC power today.

However, contrary to the fall of oil prices from $50 per barrel to $30 per barrel in 1986 when Saudi Arabia maintained its position as the oil price marker by letting the oil prices fall as it increased its production and supply, Guidi et al. (2006) assert that the current situation has other factor to consider: innovation and technology.

Although the 1986 fall in oil prices was seen as a threat to the power of OPEC countries just as it is today, Saudi Arabia emerged victorious as a dominant power where it saved the power OPEC for more than two decades (Guidi et al., 2006).

It is required that for a country or an organization to remain a cartel or the price marker, its cost of production must be lower than that of its competitors. OPEC and Saudi Arabia have to contend with this major and new factor if their plan is a replica of the 1986. There has been a heightened innovation and technological development in oil and gas extraction technology by non-OPEC countries such as the US (Braml, 2007).

According to Webb (2013), oil extraction and production at the shale by the US has managed to reduce the operation cost, thus making the US and other non-OPEC countries remain competitive amidst the falling oil prices. The reduced cost of oil extraction by the US, which is a non-OPEC country, owing to innovations and modern oil production technology is the biggest threat to the power dominance of OPEC (Webb, 2013).

According to Yergin (2006), it is even projected that the US may take over as the new world oil price marker with the fall of OPEC. This outcome has a high likelihood of succeeding since other smaller member countries in OPEC may not sustain high profits, especially when the dominant Saudi Arabia gives in to the fall in oil prices against OPEC members’ will.

Colgan (2014) asserts that although Saudi Arabia may remain afloat as a powerful oil producer and supplier and increase its market share, its price marker position is likely to crumble with the fall of OPEC. In fact, the relevance of OPEC is already crumbling, with members having divided opinions as GCC countries go for a fall in world oil prices for them to increase their market share while smaller countries such as Venezuela cling on the traditional high oil prices.

Conclusion

As evident in this discussion, the rising production of oil by non-OPEC countries is the biggest threat to OPEC’s power. Although Saudi Arabia and the other 12 OPEC member countries have controlled oil prices since 1960, developments such as the current increase in oil production by non-members and the fall in oil prices threaten OPEC’s power.

Previous strategies applied by OPEC to control oil prices by having the dominant member reduce its production while allowing smaller members to maximize profits and production have been overtaken by innovation and technology.

Countries such as the US, Canada, and Russia have made Saudi Arabia change its traditional role in OPEC, thus resulting in divisions between GCC and non-GCC members within OPEC. The use of modern technology and innovation has resulted in reduced operation cost by the US. This situation has threatened the traditional strategies that OPEC countries have been using to retain their power.

Reference List

Ahmadian, A., Hassan, A., & Regassa, H. (2013). The Impact of Oil Price Fluctuations on the Automobile Industry. International Journal of Business & Economics Perspectives, 8(2), 35-43.

Birol, F. (2007). World Energy Prospects and Challenges. Asia-Pacific Review, 14(1), 1-12.

Braml, J. (2007). Can the United States Shed Its Oil Addiction? Washington Quarterly, 30(4), 117-130.

Colgan, D. (2014). The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market. International Organization, 68(3), 599-632.

Dullieux, R., Ragot, L., & Schubert, K. (2011). Carbon Tax and OPEC’s Rents under a Ceiling Constraint. Scandinavian Journal of Economics, 113(4), 798-824

Guidi, M., Russell, A., & Tarbert, H. (2006). The effect of OPEC policy decisions on oil and stock prices. OPEC Review: Energy Economics & Related Issues, 30(1), 1-18.

Mann, Y. (2012). Saudi Arabia’s Policy Toward non-OPEC Countries. Diplomacy & Statecraft, 23(2), 381-391.

Morse, L., & Richard, J. (2002). The Battle for Energy Dominance. Foreign Affairs, 81(2), 16-31.

Portman, C. (2007). High commodity prices are here to stay. Economic Outlook, 31(4), 21-29.

Siddiqi, A. (2002). OIL: The threat of war underpins world oil markets. Middle East, 329(1), 44-45.

Webb, T. (2013, Jan. 17). OPEC stranglehold ‘will be broken by shale revolution’. The Times, p. 12.

Yergin, D. (2006). A Great Bubbling. Newsweek, 148(25), E14-E18.

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