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The End of OPEC

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The End of OPEC

OPEC is rapidly reaching a point where they will cease to exist. You are probably thinking why would OPEC disappear when their control over oil prices is so strong. Unfortunately that is no longer true. OPEC has lost control over prices and that was the main reason the organization was formed in 1960.

OPEC was formed to protect the member nations from oil price fluctuations from erratic supply. In times of plenty oil prices fell to levels that damaged the economy of the oil producing nations. When supply fell prices surged to a point where consumers cut back on their usage. The volatility in the price hurt both consumers and producing nations.

The idea behind OPEC was to balance the supply of oil so the price would remain stable. OPEC members would know in advance what to expect for income and how to budget capital expenses for new exploration and production projects. For 45 years the plan worked pretty well. There were a couple blips with the oil protests and reduction of supply to the U.S. for political reasons but overall it worked well. There were several bouts of infighting among producers with the most notable in the late 1990s when Saudi Arabia flooded the markets with oil to punish cheaters and teach them a lesson. Oil fell to $10 a barrel and the cheaters repented of their ways.

The end of OPEC will come about simply because very soon there will be no further need to regulate supply. Once peak oil arrives and all available production is less than actual demand there will no longer be any need to have quotas or restrictions on production. The loose collection of OPEC nations never liked each other and they fight constantly amongst themselves. Once peak oil arrives and oil is soaring over $200 or even $250 a barrel the term OPEC will definitely be a 4-letter word. There are talks now by the uninformed about suing them for antitrust reasons or price control violations. Once over $200 the heat on OPEC will be intense.

With no further need for quotas or production meetings being a member of OPEC will become a liability. Why not drop out of the evil OPEC club and just manage your own oil? No member country will want to continue to be associated with the group and all the negative publicity. In fact they can generate a lot of positive publicity by dropping out and pledging to produce as much oil as possible to help with high prices. Since everyone will already be producing at max capacity after peak oil arrives there will not be any actual change in output but just a change in perception.

When there is no remaining economic benefit from being a member of OPEC the members will quickly flee the organization to avoid the stigma. Today the global population hangs on every word muttered by an OPEC member in hopes the mighty OPEC cartel will be kind and open the flood gates and let the oil flow. Eventually the public will realize those gates have been open and there is no excess production.

Jim Brown

   

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