By Wael Mahdi*
The Organization of the Petroleum Exporting Countries (OPEC) is known for its massive resources: Last week, BP said the group holds 71.5 percent of the world’s proven oil reserves. But the 14-member organization is also known for its mistakes.
It is hard to tell a group of the world’s biggest oil producers, which run state-owned companies with hundreds of analysts, that they are wrong. It is even more difficult to hear the group’s officials admitting that its policies are wrong. But behind closed doors and in private discussions, everyone knows what went wrong.
The group has made many mistakes since its inception, despite the instances when it helped to stabilize the market. So what are the mistakes it made since 2014, when oil prices started to crash amid the worst global glut since the 1980s?
First, prior to the fall in prices OPEC had assumed that high oil prices of $100 will remain for a long time and that this was the new accepted level in the market. It is true that there were times when everyone believed that prices will stay high for long and that OPEC will defend this price.
Even after OPEC decided in November 2014 not to cut production to save oil prices from falling further, many outside OPEC, like the oil tycoon, T. Boone Pickens, believed that the group would indeed cut and that prices would get back to $100.
“They did not say they would not cut but OPEC will have to cut and that is what is going to happen. The Saudis are the ones that make the cut. They can take $70 oil and take it out 10 years — they have the cash reserves that allow them to do that. But they cannot do that to the rest of OPEC,” Pickens told CNBC in December 2014.
This illustrates that it was not only OPEC that was driven by that illusion of $100 oil coming back — even people in the industry were driven by the same illusion. However, Pickens was right about one thing — that OPEC would cut. OPEC was also wrong about the demand forecast in 2014. The supply response was wrong and instead of cutting in the summer of 2014, OPEC decided to rollover the 30 million barrels per day (bpd) ceiling.
Second, OPEC’s officials assumed that the cuts in capex and the high break-even price for shale oil producers would help move prices higher. That did not happen, and the cost curve of shale oil producers went down and prices remained lower for longer, amid high levels of supply and oil inventories.
Third, instead of defending their market share of 30 million bpd, OPEC started to increase production in 2015. According to BP’s statistical review, OPEC’s average production at the end of 2015 was 38.1 million bpd on average, from 36.6 million bpd in 2014. So the year ended with an oversaturated market. The market-share strategy would have proved to be a balancing force for the market if OPEC learned how to stick to targets, an issue it is still dealing with today.
Fourth, in 2016, the group was divided and could not reach an agreement to freeze production, even as around 17 ministers from OPEC and non-OPEC countries gathered in Doha in April to sign a deal that would have restored some stability to the market. OPEC could not get its act together and the market lost faith in OPEC until it was finally able to agree in 2016 to cut production.
Fifth, OPEC is still unable to eliminate the glut in the oil market and support prices, even under the current deal with non-OPEC countries to remove 1.8 million bpd from the global market. The old issues of compliance and competition in the export market are still there. Iraq’s compliance rate was 69 percent in May, according to Bloomberg. The country has shipped more oil in recent weeks and that is offsetting cuts in exports made by Saudi Arabia and a few others.
OPEC members are surely aware of many of their mistakes but will they learn not to repeat them?
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
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