OPEC’s dilemma: income vs influence

The Organization of the Petroleum Exporting Countries, aka OPEC+, just announced (as expected) that it’s maintaining its production cuts at least through until April next year.

OPEC+, you say? Yes, OPEC+. Pay attention. OPEC is the body representing 12 of the top oil producers including the Saudis, Emiratis, and Venezuelans. The cartel then signed a pact with another 10 players (like Russia, Oman, and Mexico) to form OPEC+ in 2016.

Together, they now pump around half the world’s oil, and their goal is simple: by acting as a group rather than alone, OPEC members aim to wield enough influence to set global oil prices in their favour. By agreeing on oil production targets, OPEC can decide when to inflate prices by tightening supply, and when to ease prices by opening the spigot.

Sounds simple, right? But at the heart of OPEC’s simplicity lies its vulnerability: there are some big egos and divergent interests in that group, so finding agreement is hard, and getting harder.

For example, the Saudis (the world’s top oil exporters) have gradually emerged as OPEC’s unofficial leader, setting the agenda and periodically strong-arming others around to the Saudi point of view. But that’s often to the dissatisfaction of others. Case in point: Angola left OPEC altogether just last year after continued frustration.

So, back to yesterday’s meeting (Thursday).

As expected, members of the group announced they’re again prolonging their production cuts until the end of Q1 2025 in the name of “market stability” (translation: higher prices).

OPEC+ has been withholding ~5.86 million barrels per day via a series of production cuts since 2022, and the idea was to re-open the spigot earlier this year, but the group keeps delaying.

Why? Even with these production cuts, oil prices are still lower than OPEC wants: Brent crude has been hovering around the $70-$80 mark, below the ~$90 several members need to avoid budget deficits.

In fact, the Saudis are in the odd position of having among the lowest-cost oil ($10 per barrel), but needing some of the highest prices to break even ($100) — that’s because the Crown Prince is absolutely fire-hosing cash to diversify and modernise his economy.

So he’s pushed hard to extend production cuts a little bit longer to prevent prices from dropping even lower — he even flew to the UAE over the weekend while his energy minister (and half-brother) held talks with the Russians and Kazaks. And one way he gets others over the line is by agreeing to absorb the biggest voluntary production cuts himself.

But even still, not all OPEC members are on board.

• The UAE (a regional rival) has hammered out a deal to increase production from January
• Iraq, Kazakhstan and Russia have all just ignored their daily production quotas when it suits them, and
• An official from Iran (another regional rival) just said the quiet bit out loud via a (since deleted) commentary describing Saudi Arabia’s cuts strategy as a failure.

Iran’s point is that non-OPEC members (like Canada, the US, Brazil, and Guyana) have simply increased production to seize any market share OPEC leaves on the table. And once you lose market share, it’s hard to claw it back.

Meanwhile, the world’s top oil buyer (China) is still grappling with a sputtering economy at home, which is further suppressing oil demand (and thus prices).

So, what’s next? 

Well, part of the reason the Saudis got their way and OPEC+ agreed to extend the status quo is because much of the world is currently playing ‘wait and see’ ahead of Trump 2.0:

• His nominated treasury secretary (Bessent) wants the US to pump more oil, which would push prices even lower
• And Trump himself wants to hit China with higher tariffs, which could tap the brakes on China’s growth and (by extension) push oil prices lower again
• But both Trump and his pick for secretary of state (Rubio) also want a ‘maximum pressure’ approach to sanctions on Iran and Venezuela, which could push prices higher.

Anyway, as OPEC again kicks the oil can down the road, it’s starting to look a tad less in control of its own (and everyone else’s) destiny.

INTRIGUE’S TAKE

Vienna is famous among diplomats as the espionage capital of Europe, if not the world. And one of the top targets is the OPEC headquarters there — that’s partly because OPEC members like Iran and Venezuela turn up, and it’s not every day you get to eavesdrop on (let alone recruit) officials from these isolated regimes. But it’s also because of what they’re discussing: energy. Whether you’re a buyer or seller, it’s existential.

But that energy intrigue really only makes sense in a world of energy scarcity, and our energy transition is promising a future that looks rather different: energy abundance. It’ll take decades, but the rush to dominate key inputs is already there for all to see.

Still, for the foreseeable future, the world will keep burning oil. And that means, squabbling or not, OPEC’s members will still have influence, plus the continued attention of intel services everywhere. Just maybe not so much in Vienna: in an effort to plug leaks (and entrench Saudi dominance), the last three OPEC meetings have happened online, essentially rubber-stamping whatever deal the Saudis can work out beforehand.

Also worth noting:

• The coming and going of OPEC members is nothing new: Ecuador, Indonesia, Gabon, Qatar, and Angola have all withdrawn or suspended their membership at least once since the cartel’s establishment in 1960.