Falling Oil Prices Underline OPEC’s Diminishing Influence

With oil prices having fallen more than 50% in less than six months, the OPEC group’s reluctance to cut production in order to stabilize prices reflects the threat being posed by production increases from non-OPEC countries, according to the research and consulting firm GlobalData (London). Matthew Jurecky, GlobalData’s head of oil and gas research and consulting, states that more than 70% of the 12.7-MMbbld incremental pro­duction between 2008 and 2013 came from non-OPEC countries, led by the U.S., Russia, and China.

However, the decline in prices is now slowing pro­duction growth among the least efficient producers with the highest production costs, while the market dominance of the most efficient producers with the lowest develop­ment costs, predominantly OPEC members, is being reinstated. “Any production cut from OPEC would be motivated by politics rather than economic conditions and would mean voluntarily ceding further market share to less efficient producers,” Jurecky said. “While OPEC countries make up only four of the 17 countries that have seen the most dramatic production declines, they represent over 30% of the overall production fall. OPEC is facing dimin­ishing influence on the overall crude space and encounter­ing new competitors, including some former customers in previously secure markets.”

The U.S., for example, encouraged by its rapid production growth and lucrative international market, is on course to reverse an oil export ban dating back to 1975, which effectively protected OPEC’s markets. Similarly, while Africa used to be the source of more than 2 MMbbld of crude imports into the U.S., it now exports only 150,000 bbld to the country, with the rest going to Asia.

“There are game-changers ready to fuel the next wave of reserve additions and production growth, but in terms of low oil prices, exploration activity will cool,” said Jurecky. “The tight oil floodgates that were opened in the U.S. will be contained internationally for the time being, while ultra-deep water and harsh environment exploration will be delayed. Other opportunities will be dictated by political interests. For example, inviting foreign participa­tion in Mexico’s oil industry will further challenge the status quo of export markets, as there remains significant easy-oil opportunity [there], even with low crude prices.”