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Are OPEC’s days numbered?

December 3, 2018

As Qatar leaves OPEC, a Troika of Saudi Arabia and non-OPEC members Russia and the US are likely to press ahead with their own interests. So, are the days of OPEC dominance numbered?

Katar | Energieminister Saad al-Kaabi
Image: Getty Images/AFP/A. Levasseur

When the head of Qatar's OPEC delegation said his country's decision to leave OPEC as of January was not political, oil traders the world over stifled a collective snigger.

The fact that OPEC members, Saudi Arabia and the United Arab Emirates, plus Bahrain and Egypt, imposed a boycott on Qatar in June last year, accusing the tiny Gulf state of supporting terrorism, did not enter the equation.

Read more: Qatar's OPEC exit rooted in Gulf region's diplomatic unrest

The decision, energy minister Saad al-Kaabi said, was driven by his country's long-term plans to increase its liquefied natural gas (LNG) output to 110 million tons by 2024 from 77 million today, consolidating Qatar's position as the world biggest LNG exporter. 

Little impact

Qatar has oil output of only 600,000 barrels per day (bpd), or just under 2 percent of OPEC's total output, compared with 11 million bpd produced by Saudi Arabia, the group's biggest oil producer and world's biggest exporter.  

Since 2013, the amount of oil Qatar produces has fallen from 728,000 barrels per day in 2013. Total OPEC production, meanwhile, has increased from 30.7 million bpd to 32.4 million bpd. 

"I see limited fallout from the Qatari decision to leave OPEC," Ole Hansen of Saxobank told DW. "The cartel still plays an important role but it is becoming increasingly clear that the direction of oil is being set by the decisions taken by the Troika consisting of the US, Russia and Saudi Arabia."

Read more: US shale oil forecasts too optimistic, even IEA agrees

Hansen also said that Qatar's move did send a political signal, given its "dire relations" with Saudi Arabia, "but at the same time it makes sense to focus on natural gas which brings in almost 3 times the revenue compared with crude oil."

Other saw the decision as largely symbolic. "It is consistent with diverging political and economic interests between Qatar and Saudi Arabia. I think it just adds noise to the market, as its impact will be negligible when compared with the outcome of the OPEC+ meeting," Daniela Corsini of Intesa Sanpaolo in Milan told DW.

OPEC Treffen - Alexander Novak, Khalid A. Al-Falih,  Mohammad Sanusi Barkindo
The 58-year oil cartel has 15 members — six in the Middle East, seven in Africa and two in South America. Saudi Arabia is the dominant force in the group, accounting for around one-third of its total oil productionImage: picture-alliance/dpa/Sputnik/A. Vitvitsky

All change at OPEC?

OPEC will meet later this week with allies outside the cartel such as Russia. The meeting is widely expected to agree on a production cut to boost prices that have fallen 30 percent since October. 

The cartel's 15 member states account for about half of global production. US oil production jumped to a record 11.6 million bpd, overtaking Russia — then the world's biggest oil producer — by 0.2 million bpd. Saudi Arabia's production is about 10.7 million bpd.

With US oil production rising and increased pressure on Saudi Arabia after the murder of journalist Jamal Khashoggi, the country is reportedly reviewing the global oil market and its role in it.

US President Donald Trump has been critical of OPEC and draft US legislation exists that could declare the organization an illegal cartel. Riyadh is under pressure from the US not to cut production this week. Trump appears to support the view of OPEC as a player in the marketing not a custodian of it. 

Read more: Donald Trump vs. OPEC: What can he do to bring down oil prices?

Critics suggest OPEC's weaknesses and inflexibility make it ill-suited to the role of managing the oil market. Joyce Mathew of United Securities no longer sees OPEC as a cartel. Rather it was an "indirect platform for enemy countries" to share opinions and connect with each other.

"We have Iran and Iraq, Saudi and Libya still sharing the platform. Qatar leaving the cartel may not bring any sea change unless other countries follow suit, which could be potentially threatening to the integrity of the cartel. I see low chances of such a move by any other member," Mathew told DW.

A Russian-Saudi oil alliance

Moscow has worked more closely with Saudi Arabia in oil production in recent years and the ties look set to strengthen. Saudi Arabia and Russia said earlier this year they could be looking to create a "super group of oil producing countries," in effect institutionalizing the framework in place since late 2016.

On Sunday, they agreed at the G20 to extend into 2019 their agreement to manage the oil market — known as OPEC+.

Alternatively, a kind of free-for-all is not inconceivable. Big oil producers in the world would fight on the global market after the demise of OPEC, with Saudi Arabia seeking to leverage its own output capacity and act as a sort of one-country OPEC. 

The fear here is that other participants would also return to producing flat out, possibly crashing oil prices all over again. The period between 2014 and 2016, when OPEC let the market sort things out on its own, was characterized by price swings, volatility and uncertainty.

Oil prices up after OPEC nixes output rise

Head shot of a man (Jo Harper) with grey hair and brown eyes
Jo Harper Journalist and author specializing in Poland