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A few years ago, as U.S. shale oil production soared towards 11 and then 12 million bpd, turning the country into the world’s largest oil producer, it was fashionable to start imagining that OPEC was becoming irrelevant. It took a pandemic to refute that argument; and now, OPEC is more relevant than ever. Yes, the cartel is riddled with internal rifts and disagreements, with much speculation about a breakup. And it’s fair enough to consider what the world would look like without OPEC.
The short answer is, of course, that it would look quite different. With no oil cartel to control prices, every country with oil reserves would be free to exploit them at will, pumping to the maximum to take advantage of any opportunity to grow their market share—something that some OPEC members would very much like to be doing right now but cannot because of cartel obligations.
Without OPEC, oil prices would be a lot more volatile than they already are, even now, in some of the most uncertain times since oil began being used on a global scale. This, of course, would be boon for the new generation of day traders who are already having a disproportionately large effect on oil prices simply because of their numbers, with trading made as easy as playing Candy Crush.
As Adam Rozencwajg, managing partner at Goehring and Rozencwajg, told Oilprice, “If OPEC were dissolved tomorrow there would undoubtedly be massive near-term price volatility.” However, Rozencwajg added that longer-term volatility was likely to suffer a lot less excess, comparing the 30-year historical volatility of crude to the same indicator for Henry Hub gas prices.
Without OPEC, the security of the global oil supply would be a lot shakier than it is now, as well. One might argue that in the energy transition world, with oil losing relevance fast, this should not be of any serious concern; but in fact, oil is not losing its relevance so fast. It will be around for decades to come.
Yet, with OPEC members on the loose, free to produce as much oil as they want or can, there may be less incentive for oil companies to invest in new production to secure future supply, and this would increase supply insecurity over the long term, says Rozencwajg.
An Oxford Institute for Energy Studies’ report from last year looked at how the world would have looked if OPEC hadn’t been around between 1990 and 2018.
The analysis of data showed that global oil production would have been substantially higher with no cartel to keep it under control. It also suggested that oil supply shocks resulting from geopolitical events would have had a much greater impact on oil prices in a world without OPEC because in such a world everyone would be pumping at capacity, meaning they would have no spare capacity to tap and fill the gap in supply.
For instance, if there was no OPEC, when drone attacks on the Khurais field took 5.7 million bpd off Saudi oil production in 2019, there would have been a supply shock and prices would have jumped much higher than they actually jumped in the wake of the attacks.
In fact, at the time, some analysts were forecasting $100 Brent prices; but there were also more sober minds that said there was no reason for oil to rise so high given that some OPEC+ members could increase production and that U.S. shale would do the rest. But if all OPEC+ members were pumping at capacity, it would have been up to U.S. shale to supply the difference and that would have taken a while.
As the Oxford Institute notes in its report, “Historical evidence shows that OPEC’s spare capacity has had a smoothing effect on global oil price movements, with prices under the counterfactual scenario exhibiting much sharper cycles both on the upside and the downside. For instance, in a world without OPEC spare capacity, the price would have risen by $110/b, from $51.6/b in 2010 to $161.7/b in 2012, compared to $30.7/b in the actual world.”
A world without OPEC would also likely see an even more disciplined oil industry. As one Wall Street Journal analysis from 2016—the previous oil price crash—suggested, when OPEC stopped trying to control prices and went for market share, prices slumped and investments were slashed. This is, of course, what happens during every oil crisis; but with no OPEC, this aspect of the crisis—stricter capital discipline—may have become the norm.
So, increased price volatility, stricter spending discipline in the industry leading to lower supply security in the future, and, as the Wall Street Journal noted in its analysis, an increased presence of hedge funds and other speculators in oil markets would be some of the post-OPEC features.
This would be a world with probably much more dramatic price swings and also a world of even deeper oil dependence for already oil-dependent economies, as these states would have a lot less motivation to diversify away from their principal source of budget revenues. For all the power OPEC has been resented for wielding on global oil markets, it seems that without it, things may have been worse.
