How OPEC Lost Its Bite

The Oil Cartel That Behaves Like a Club

The logo of the Organization of the Petroleum Exporting Countries (OPEC) is pictured on the wall of the new OPEC headquarters in Vienna, March 16, 2010. Heinz-Peter Bader / Reuters

The last time that the world’s oil ministers met—in June in Vienna, Austria—oil hovered around $65 per barrel, a recovery from the steep drop earlier in the year. The meeting concluded with optimism that the plunge in oil prices had largely abated. As the Organization of the Petroleum Exporting Countries (OPEC) meets again—with its oil basket price now just below $40 per barrel—delegates will have to grapple with how wrong they were.

There are two theories about how OPEC will handle the bad news. The first centers on the fact that, after a year of low oil prices, the Saudis are facing open revolt from other OPEC members for letting the market, rather than production, determine prices. Saudi Arabia is loath to cut oil production because it would bear most of the cost in terms of lost sales, while higher prices would mostly benefit others, including non-OPEC producers in the United States and elsewhere. But now, countries such as Algeria, Iran, Iraq, and Venezuela want the organization to live up to its reputation as a cartel and do what cartels do: constrain supplies to raise prices. If that doesn’t happen, the International Energy Agency has warned, OPEC members can expect huge budgetary deficits and political unrest. Even OPEC Secretary General Abdallah Salem el-Badri admits concern about the lower prices, calling it a “test for all producers and investors” and “a challenging time for the industry.”

A worker collects crude oil sample at an oil well operated by Venezuela's state oil company PDVSA in Morichal, July 28, 2011. Carlos Garcia Rawlins / Reuters

The other theory is that OPEC will maintain its production target and maybe even increase it since it will be welcoming Indonesia back into its fold after a seven-year hiatus. OPEC has set a ceiling of 30 million barrels per day, which it has already exceeded thanks to large outputs from Saudi Arabia and Iraq, and the addition of Indonesia will push the total production to roughly 32.5 million barrels

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