Perhaps more important than the price increases themselves was the new world order the embargo signaled. The embargo set in motion geopolitical circumstances that eventually allowed [OPEC] to wrest control over global oil production and pricing from the giant international oil companiesushering in an era of significantly higher oil prices, as Amy Myers Jaffe and Ed Morse noted in an article in Foreign Policy magazine that was published last year at the 40th anniversary. Twice a year, OPECs oil ministers would meet in Vienna, where they would set oil policydeciding to either hold back or increase oil production. There was always cheating among members, but there was usually enough discipline in the ranks to keep prices more or less where OPEC wanted them.
As it happens, the title of that Foreign Policy article was The End of OPEC. Jaffe and Morse are both global energy expertsshe is the executive director of Energy and Sustainability at the University of California, Davis, and he is the global head of commodities research at Citigroupwho say that if America plays its cards right, OPECs dominance over the oil market could be over. I think that day may have already arrived.
OPEC is not going to survive another 50 years, Morse told me. It probably wont even survive another 10. It has become extremely difficult for them to forge an agreement.
When Morse and Jaffe wrote their article last year, the price of oil was more than $100 a barrel. Today, the per-barrel price is in the low- to mid-$80s. It has dropped more than 25% since June. There was a time when $80 a barrel would have been more than satisfactory for OPEC members, but those days are long gone. Venezuelas budgetary needs requires that it sell its oil at well above $100 a barrel. The Arab Spring prompted a number of important OPEC membersincluding Saudi Arabia and the United Arab Emiratesto increase budgetary spending to keep their own populations quiescent. According to the International Monetary Fund, the United Arab Emirates needs a price of more than $80 to meet its budgetary obligations. Thats up from less than $25 a barrel in 2008.
Not long ago, Venezuela asked for an emergency OPEC meeting to discuss decreasing production. Iran has said that such a meeting is unnecessary. Meanwhile, Saudi Arabia has made it clear that it is primarily concerned with not losing market share, so it will continue to pump out oil regardless of the needs of other OPEC members. This is not exactly cartel-like behavior. The next OPEC meeting is scheduled for late November, but there is little likelihood of an agreement.
And why does OPEC suddenly find itself in such disarray Simply put, the supply of oil is greater than the demand, and OPEC has lost its ability to control the supply. Part of the reason is a slowdown in global demand. Chinas economy has slowed, and so has its voracious appetite for oil. Japan, meanwhile, is increasingly turning to natural gas and nuclear power.
But an even bigger part of the reason is that the shale revolution in North America is utterly changing the supply-demand dynamic. Since 2008, says Bernard Weinstein, an energy expert at Southern Methodist University, oil production in the United States is up 60%. Thats an additional 3 million barrels a day. Within a few years, predicts Morse, America will overtake Russia and Saudi Arabia and become the worlds largest oil producer.
Whats more, according to another article Morse wrote, this one for Foreign Affairs magazine, the costs of finding and producing oil and gas in shale and tight rock formations are steadily going down and will drop even more in the years to come. In other words, the American energy industry might well be able to withstand further price drops easier than OPEC members.
When I got Jaffe on the phone, I asked her if she thought OPEC was a spent force. You can never say never, she replied, and then laid out a few dire scenariosmostly revolving around oil fields being bombed or attackedthat might make supply scarce again. But barring that, this is a moment weve long been waiting for. Thanks to the shale revolution, OPEC has become a paper tiger.