This article was first published at The McAlvany Intelligence Advisor on Monday, October 27, 2014:
Tim Treadgold, a Forbes contributor who watches the world’s energy markets, decided to break the journalist’s unspoken rule: never forecast the demise of an individual (or an institution) until he is holding the coroner’s report (or bankruptcy judgment) in his hand:
At grave risk of committing [that] cardinal sin … this time it might be different because OPEC is steadily losing control of the oil market….
The irony, he said, was staggering:
Countries which once dictated terms to the rest of the world … [are] now facing an existential dilemma….
Back in the fall of 1973, those terms had teeth. Within days of the US and the United Kingdom giving aid to Israel after it was attacked by its enemies on its holiest of holy days, OPEC announced a series of embargoes and price increases that came close to shutting down those western economies. Oil prices quadrupled, gas lines stretched around the block, the stock market tanked, and unemployment rose to levels not seen since the end of the war. Even after Henry Kissinger intervened and persuaded Israel to back off, resulting in the end of the crisis in March 1974, the negative effects were felt for years afterward.
At the time, OPEC supplied nearly half the world’s oil and was delighted to learn just how that commodity could be used as a weapon against its enemies. But that was then. This is now: OPEC still produces about 30 million barrels (bpd) of oil every day – the same as it did back in 1973 – but the world demand for oil has increased by 50 percent: from 50 million bpd to over 90 million today. And that demand is now being met (and then some, according to the International Energy Agency) by enormous increases in supply from the US and, to a lesser extent, Putin’s Russia. Saudi Arabia’s position as “swing producer” in OPEC has diminished accordingly: while still producing one-third of OPEC’s output, that represents barely more than 12 percent of the world’s supply, with predictable results.
Earlier this summer, the Saudis attempted to slow the rapid decline in the world price of crude by withdrawing 400,000 bpd from the market. They failed miserably. In September, it reversed its position, announcing it was cutting its prices to its largest customers without consulting with any of the other eleven cartel members. Price cuts among those other members began almost immediately, while Iran’s call for an emergency meeting in advance of the one already scheduled for next month was summarily ignored.
Jeff Colgan, an assistant professor at the School of International Service at American University, studied the price action of the OPEC cartel all the way back to 1982. He published his startling results just two weeks ago in The Washington Post:
OPEC rarely if ever influences its members’ oil production rates. It has almost no impact on prices….
I found that … members cheat on their quotes a whopping 95 percent of the time; [that] changes in OPEC quotes have little impact on changes in production; and [that] members of OPEC produce oil at about the same rate as non-members of the group….
Any of these findings would cast doubt on OPEC’s status as a cartel; collectively they are damning.
In short: the world has been fooled for years, thinking that OPEC was the elephant in the room that needed to be treated with deference and respect. Instead, Colgan wrote, OPEC is a hollow man, a boys’ club for grownups wearing towels on their heads and suffering from excessive hubris:
OPEC is a political club.
It perpetuates a “rational myth” about its cartel power [in order] to generate political benefits and prestige for its members.
Howard Hamm remembers those gas lines, the clout that OPEC wielded back in 1973, and now revels in the change in fortune. Hamm, the CEO of Continental Resources, which has been fracking the Bakken Shale underneath North Dakota with great success, expressed his delight at that change at Investor’s Business Daily over the weekend:
OPEC is becoming a toothless tiger.
The underappreciated reason for this bullish turn of events is the US energy revolution and the technologies that make this all possible….
America is no longer a bit player in global energy production. Now our country is well-positioned for energy independence by the end of the decade, and then for world energy supremacy for decades to come.
Thanks to those technologies, oil production in the US has increased by more than 65 percent in just the last five years, which, according to Hamm, provides an opportunity for the US to stick it to OPEC and the Saudis:
We can and should use our nearly unlimited oil and gas supplies to drive a stake through the heart of OPEC – forever.
Happily, the free market has been doing just that. The International Energy Agency (IEA) has just reduced its forecast for the world’s demand for oil next year while increasing its forecast of its supply. With 92 percent of Saudi Arabia’s budget dependent upon its oil revenues, the reduction in those revenues is going to be causing major pain in Riyadh.
For people with long memories, like Hamm, the reduction in the world price of crude oil (for which he is partly responsible) is no doubt bringing a certain sense of satisfaction at how the free market tends to even scores and mend injustices.
Forbes: News Of OPEC’s Death Might Not Be An Exaggeration
The New American: OPEC Continues to Unravel
Investors’ Business Daily: Fracking Revolution Cuts Prices, Drives A Stake Through OPEC’s Heart
Washington Post: 40 years after the oil crisis: Could it happen again?