After the Corona pandemic ... has OPEC lost its control over the oil market?

This week marks the 60th anniversary of the founding of the "OPEC" organization, which unites the major oil exporters, which has sometimes gained some influence over the oil market;

But is this organization still effective?

In a report published by the American Bloomberg website, writer Alan Wald said that OPEC's ability to influence the price of oil has declined over the past 60 years;

But this effect persisted on part of the global spare capacity, which the organization controls, and with a lot of crude oil stored in tanks around the world, this situation makes OPEC ineffective today.

When the Organization of the Petroleum Exporting Countries (OPEC) was established in 1960, it was working on achieving two tasks, the first being to defend the price of oil by imposing restrictions on production, and the second centered around strengthening local governments' control over the oil resources on their territories;

But for more than a decade, OPEC has been clearly ineffective in achieving its goals.

This organization did not gain fame and did not constitute a point of political discussion until the year 1973, when it succeeded in destabilizing the oil market by being able on its own to impose high crude oil prices on both the major international oil companies and consumers.

In 1973 OPEC succeeded in destabilizing the oil market by imposing high crude oil prices on both major international oil companies and consumers (Reuters)

The extent of OPEC's control

In fact, the main reason OPEC was able to seize this control in 1973 was because of the decline in crude oil production in Texas in 1970, and since the early 1970s, Texas can no longer be relied upon to meet the growing demand in the United States. Instead, the country has moved towards Dependence on foreign oil imports, and given that OPEC countries controlled 80% of oil exports in that period, the United States found itself under pressure because of this organization, as it is the case for its allies such as Japan.

The writer indicated that OPEC was simply able to set the price of oil it wanted, and customers had no choice but to pay, and the major oil companies were forced to adhere to OPEC's decisions in order not to lose their share.

In addition to the oil embargo imposed by OPEC, this organization was able to control the market, and the price of oil increased dramatically, and the producing countries made huge sums of money.

In fact, OPEC would not have been able to achieve this if the producing countries had not controlled the global spare capacity, and along with the increasing demand for oil during that period, this reflected the urgent need of the world for OPEC oil.

However, OPEC's power to influence oil prices has not been consistent over the past 60 years;

Because it has not maintained its permanent control of global spare capacity.

For example, oil prices collapsed in 1986, and OPEC was unable to remedy the situation to raise prices, due to the availability of oil from sources outside OPEC countries and weak demand.

At the time, OPEC tried to reduce production, as Saudi Arabia reduced its production to only two million barrels per day, but prices remained low, and in the end, only the increase in demand was able to raise prices.

In 2014, Saudi Arabia and OPEC lowered oil prices by stopping the organization's production quotas;

But within 6 years OPEC has not been able to bring the price closer to what it was before the crash, and this failure is due to the massive influx of supplies from US shale oil and other global exploration areas that are bearing fruit.

Before the Corona pandemic, the United States was producing 13 million barrels per day, which represents a world record.

But even OPEC's attempts to coordinate with outside countries such as Russia and Mexico have yielded only limited results.

OPEC faces a bad situation today due to the economic repercussions of the health crisis caused by the Corona virus (Reuters)

OPEC and facing Corona

Today, OPEC faces a worse situation than before, because due to the economic repercussions of the health crisis caused by the Corona virus, American production has decreased to less than 11 million barrels per day, and it is certain that the United States has the ability to produce at least another 3 million barrels.

Any attempt by OPEC and its partners to reduce production and raise the price of oil will be matched by an increase in production from shale oil producers in the United States, who are rushing to take advantage of the situation again, but for a short period as oil prices rise.

Long periods of low oil prices indicate that less money is invested in exploration and production of new sources of oil, and due to the collapse in 2014 and the recent catastrophe in oil prices in the spring of 2020, nearly all producers have slashed the exploration budget significantly.

But once the global economy recovers and in the event that demand rises again, we may be on the verge of witnessing a shortage of oil supplies that would make OPEC the main engine of prices as before.

On the other hand, the Organization of Petroleum Exporting Countries fears that demand will decline in a continuous fashion, because new innovations allow the world to use alternative fuels.