In a landmark decision on November 30, 2023, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, reached an accord to reduce oil production by 1 million barrels per day (bpd) starting in January 2024. While this decision was prompted by various factors, delving into OPEC’s motivations provides a deeper understanding of the intricate global energy landscape.
OPEC’s primary objective is to maximize the value of crude oil reserves among its member countries, a stance embedded in official government policies. This contrasts sharply with the approach of many net crude oil-importing nations, such as the United States. In the U.S., government policies generally aim for stable yet low energy prices, a goal that often clashes with the aspirations of the domestic oil industry.
In OPEC member countries, the alignment of goals is apparent. Governments in these nations heavily rely on revenue generated from crude oil sales in the export market. Consequently, OPEC strives to attain the highest possible oil prices without triggering a global recession or encouraging rival production and conservation efforts.
While OPEC seeks to control the supply to influence prices, it simultaneously aims to sustain or increase its share of global oil production and export volumes. The fear of losing substantial market share looms, as it could erode the cartel’s ability to shape the market.
The advent of the shale oil boom in the U.S. altered the landscape. OPEC’s traditional ability to prop up prices without inadvertently incentivizing U.S. production has diminished. The surge in U.S. oil production has shifted the dynamics, reducing OPEC’s influence over pricing.
Nevertheless, OPEC and its allies played a significant role, contributing to approximately 50% of the world’s oil production in 2022, while maintaining control over 70% of the world’s proved reserves. Despite the challenges, they continue to wield substantial power in influencing global oil prices.
However, the impact of OPEC’s decisions resembles steering a massive ship – it takes time. When OPEC announces a production cut and follows through, it eventually curtails excess supplies. Simultaneously, non-OPEC countries, led by the U.S., are ramping up production, effectively offsetting OPEC’s production cuts. This dynamic resembles an ongoing arms race, with the U.S. successfully increasing production to counteract most of the effects of OPEC’s cuts.
A noteworthy aspect is OPEC’s use of production cuts as a political tool. Anticipating this strategy, the recent production cut aligns with expectations. Looking ahead, there is speculation that OPEC may resort to further production cuts next year, particularly as the world approaches the presidential election.
The political chessboard involves considerations such as OPEC members, including Saudi Arabia, and allies like Russia, potentially favoring the reelection of Donald Trump. Consequently, driving prices up ahead of the election could be a deliberate move to influence the political landscape. The impact of gasoline prices on the election outcome, especially in the context of President Biden seeking reelection, adds an intriguing dimension to monitor in 2024.