Is OPEC on the brink of breaking apart?
Should the 56-year-old oil cartel fall, which holds a critical meeting next week, much of the blame will lie with Iraq and Iran. It used to be that Saudi Arabia, the largest producer in OPEC, could rein in and control all the member-states. But times change, and once Iran and Iraq need more and more cash to sustain themselves, threatening the alliance.
Neither Iraq nor Iran—the second and third largest oil producers in OPEC respectively—after the Saudis is holding to their production quotas, which props up the price of oil as high as possible. Spikes in crude prices, typically result in a push for OPEC clients to invest in alternative sources for energy. Experience has taught Saudi Arabia and OPEC not to mess with output numbers.
A cartel like OPEC only works if everyone maintains production quotas. Discipline is essential. But at the same time there is strong incentive to break away from the pack.
The equation seems simple: The more oil one produces, the more profit one makes. But it’s not really that simple. When more oil is produced, the price drops. When a cartel member cheats, they ultimately make more money, but on volume, not on each barrel. So actually, they make less (per barrel) as does everyone else in the cartel.
With Iran and Iraq cheating, Saudi Arabia worries about losing its power and prestige in the world and in the Middle East. Now that sanctions against Iran have been lifted, Tehran is embracing its new power and becoming wealthier. With that wealth, they are spreading their influence and checking the Saudis.
Iraq, meanwhile, needs an influx of cash to fight ISIS.
At the same time, competition is on the rise. More countries now produce oil, weakening the stranglehold that the cartel once held over the world market. Of the top 10 oil producers in the world, just six are members of OPEC. But of the top five, only two are OPEC members (Rounding out the top five after Saudi Arabia and Russia are, in order, the United States, Iraq and China). In 1973, the year of the Arab Oil Embargo, the cartel captured about 54 percent of the world’s oil market, according to the Middle EastResearch and Information Project down to about 40 percent today.
While oil prices have been going up, rising from less than $25 in February to about $49 today, if OPEC falls, the price of oil will find a more natural level based on a true supply/demand calculation. It would likely mean much cheaper oil which in turn would lead to cheaper electricity and cheaper gasoline. The ripple effect would be dramatic across the board. Even plastic, a petroleum product, would cost less.
The breakup of OPEC would benefit everyone—everyone except the fourteen member nations of OPEC.