OPEC 2.0: Price Taker or Maker?

Wael Mahdi 

Until last December, when it made a deal with other global producers to restore balance in the “sick” oil market, the Organization of the Petroleum Exporting Countries (OPEC) was considered by many analysts as “weak” and “irrelevant,” and some even went as far as considering it “dead” altogether.

There is some validity to those claims. OPEC lost much of its power over the market in recent years, given the shale oil revolution in North America.

OPEC is still the largest oil supplier and the group controls the world’s biggest proven oil reserves. It will still pump oil for years to come. However, OPEC cannot influence the price curve of oil as it used to. Moreover, its market share has been subject to severe competition from other producers outside the group, from Russia to Canada.

Confronted with all these challenges, OPEC has been trying to find a way to restore its power. There is now a new OPEC in the making. This “OPEC 2.0” is basically the same old organization plus the non-OPEC producers that formed the alliance in December 2016 to save oil prices and the market.

OPEC 2.0 was successful in restoring a considerable amount of stability to the market, with oil prices starting since last year to have a floor. Nevertheless, there are still more challenges ahead. 

First, for how long will this alliance between OPEC 1.0 and the non-OPEC producers last? How big will OPEC 2.0 be? What will happen to OPEC 2.0 after the agreement to cut output expires in March 2018? Will the alliance be there after the market is rebalanced and prices hit a good level?

Despite all these concerns, the main issue that remains for OPEC 2.0 is the issue of control over prices. OPEC 1.0 has for many years been a “price taker,” no longer a “price maker” as the financial paper market and marginal producers such as shale oil drillers took over. 

There are two ways for OPEC 2.0 to turn into a “price maker.” It can add more producers to its alliance, or it can think outside of the box and find other ways to price its crude. The latter seems to be a difficult and complex task so the group is focusing on supply management with other producers.

Forming OPEC 2.0 is not only a matter of power over price but also a matter of existence as without having control over the market, prices can move too high and allow more high-cost producers to jump in and shake the market’s stability, or it can go too low and curtail investments in the industry and destroy many of the oil producers’ economies.

So far OPEC 2.0 succeeded in adding more conventional oil producers who produce the same type of oil that OPEC 1.0 members pump, including Indonesia, which does not fit OPEC’s definition since it became a net importer of crude.

What would be a game changer and help OPEC 2.0 to become an influential “price maker” would be if it added more producers like Brazil, Argentina, China and Canada, some of which have great potential in unconventional oil. But bringing such heavyweights on board will require serious effort and a lot of political and economic alignment, as was seen with Saudi Arabia and Russia. 

Russia, in fact, is adding great value to OPEC 2.0 as it sits on both sides. It is the world’s largest conventional crude oil producer and at the same time, it has one of the largest shale oil recoverable resources. So keeping Russia in OPEC 2.0 is becoming a must in order for the alliance to succeed and to last.

But for now, OPEC 2.0 is becoming a great platform because not every non-OPEC producer can join OPEC 1.0 for political or other reasons. What the market looks for now is an assurance that this alliance will not break up next March, and that it will remain in place for longer. 

  • Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi


(Source: ArabNews.com)

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