Jim Kingsdale

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Seeking Alpha: The End of OPEC

posted on: May 11, 2008    

Churchill’s assessment applies to the current oil situation: this is the beginning of the end of OPEC. That much is obvious; the more interesting question is “why?”

OPEC was founded in 1960 to protect the interest of its members, major oil exporting nations. That interest is to stabilize world oil prices at levels that balance their competing objectives to maximize both long term oil demand and the short term oil price. The idea was to keep enough oil off the market during glut periods to elevate the price and insert enough oil onto markets and lower prices during crises to prevent a global recession and to subvert movements toward substitutions for oil.

The cartel has struggled with both tasks. They have had some successes and some failures in keeping short term prices high. But since prices broke out of the $30 ceiling in 2003, OPEC had had little success in containing the price rise. Now analysts are increasingly questioning whether OPEC is able to contain oil prices. Whether they can or not will soon become evident. Regardless of whether OPEC can lower oil prices in the near term, it is clear that soon enough OPEC will not have that ability.

Let me digress for one moment to address the concept of Peak Oil, because I need to use the term. It is now time to adjust our definition, since the term is increasingly being used in a new way by the popular press. “Peak Oil” no longer carries Hubbert’s geological meaning: roughly, the time when maximum oil flow cannot be increased because decreased reserve levels prevent human efforts from being able to get it out of the ground any faster.

Instead, “Peak Oil” is now becoming known as the time when maximum global oil production has been reached for reasons that include both geological constraints and human behavior. In the latter category we have two things: political events that contain production in countries like Nigeria, Iraq, and Venezuela on the one hand. And on the other hand we have conscious decisions to hoard oil by countries like Russia, Kuwait, and, recently, Saudi Arabia, which have all acted to produce oil at less than the maximum geologically possible level.

So, now that you understand what I’m referring to, let me assert that we are now – or soon will be – at Peak Oil due to both geological and human reasons. Both factors working in tandem have created Peak Oil – if not today, then very soon.

I suspect the new Saudi fields being brought on this year and next will give them some ability to flood the market with oil and lower the price temporarily if they choose to do so. But once that surge is over, probably starting in 2010, there will be no ability of OPEC to influence the price of oil. In a Peak Oil world, OPEC, by definition, will not be able to contain the rise in the price of oil; they simply will not have the reserves to do so. Since we are either at or very near Peak Oil, OPEC is now or soon will be quite powerless.

So why is OPEC still hanging around? Quite simply because the world at large is still hanging on their every word. They still have the psychological ability to influence the oil price. They are the Wizard of Oz Oil. Like the Wizard, as soon as they are discovered to be feckless, they will lose their power once and for all, but for now they still have that power.

This explains why OPEC is currently saying, first, that there is no supply problem in oil, that the high price is all due to speculation. Second, they are saying they will meet in September to re-consider their stance. Why? Because right now they cannot add much oil to the market, but they hope that by September the new Saudi fields will be on line and capable of actually making a difference in the global supply. They could maybe do that for a year to two years before being swamped by new higher levels of demand once and for all.

Why will OPEC end? Well, clearly once they are known to have no power they will have no reason to exist. But even before that, I suspect they may wake up to the fact that OPEC no longer benefits their members. While their powers have diminished to nearly zero, they are increasingly being blamed for the rise in oil prices that is starting to become a serious problem for the global economy and is already a disaster for the world’s poor.

Why would OPEC members want to keep that scorn focused upon themselves? It makes no sense. They no longer benefit economically from OPEC because it is not OPEC that is keeping their oil price high. No economic benefit AND becoming the object of global blame? It is not in their self-interest. I predict that OPEC will soon disband. I define “soon” as within the next three years.

http://seekingalpha.com/article/76725-the-end-of-opec?source=d_email

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