Imagine a world without OPEC

Imagine a world without OPEC. This is what the authors of the laws presented in both houses of Congress seem to want. The versions of the Prohibition Act to Produce and Export Petroleum Products, or the NOPEC Bill, go through the Senate and the House of Representatives and will likely find more support from the White House that in the past … Presidents George W. Bush and Barack Obama both threatened to veto a similar law

The bill would enforce US antitrust laws against the OPEC members whose sponsors say they have "used production quotas to keep up artificially high oil prices". This is a popular argument in a country where the right to cheap gasoline could have been written into the constitution at the same time as the right to bear arms if this document had been written a few hundred years ago. years later. But we must look a little further than the forecourt of the gas station. And when we do, we will not look at the promised land.

OPEC introduced production quotas in 1982 to divide production between member countries facing a third year of declining global oil demand and an increase in the supply of countries such as oil and gas. Mexico and India.

Saudi Arabia had already reduced its oil production by 30 percent and, just like in 2016, it was no longer willing to badume alone the burden of balancing the price of oil. supply and demand for oil.

Making Space

The management of OPEC supply in the 1980s and 1990s gave way to a growth of non-OPEC production

What would have happened if OPEC had not been reunited? Of course, drivers in America and elsewhere would have appreciated cheaper gasoline for a while. But probably not too long. Even with the group's supply management, oil prices reached a low of about 14 dollars a barrel in 1986, according to BP Plc data.

How much further would it have fallen if member countries continued to produce without restraint? Certainly low enough to make production unprofitable in Alaska, in the Gulf of Mexico, in the North Sea, in Western Canada and in a host of other provinces that have become the mainstays of non production. -OPEP. billion barrels of additional non-OPEC production in the 20 years it took for their supply to return to the level it had been in 1978.

But nearly 40 years later, the world is a different place. This is what would happen if the NOPEC bill became law and the group did not protect itself from its scope. It would be the world without the OPEC.

There could be no collective action to try to balance the supply and demand of oil. Saudi Arabia has repeatedly stated that it would fail to balance the market by itself and that it would support high-cost oil producers.

You do not have to look too far to see what this means in practice. Just think back four years, at the height of OPEC's willful pumping policy. Oil prices dropped to $ 26 a barrel – excellent for drivers, but not as good for the US oil sector, or for investing in the future production capacity needed to offset the natural decline of existing fields.

The end of Saudi Arabia's production restriction had a devastating impact on the US oil industry

Note: The two sets of data are relative to August 2014, when there were 1,575 active oil rigs in the United States. 9.6 million barrels a day

As Saudi Arabia increased production, the number of oil rig drills in the United States fell by 80%. The only region in the world where drilling has not declined was the Middle East. It was not long before calls, including Trump's energy advisor, to OPEC to take action to reduce supply and save prices that were too low for the US industry. shale.

for any person to hold an alternative production capacity. In recent decades, this will has been an important safety valve to ease the pressure of supply disruptions.

A study by the King Abdullah Petroleum Research and Studies Center, launched in 2016, badessed the annual economic benefits of OPEC. production capacity is between $ 170 billion and $ 200 billion due to reduced price volatility during periods of supply disruption. According to the study, the price of oil could have exceeded $ 300 a barrel during the Libyan revolution.

The largest stock of oil held by consumers – the US Strategic Petroleum Reserve – could not cope with the loss of supply Iraq invaded Kuwait in 1990 and reportedly struggled to offset the loss of Libyan production in 2011 for more than five months.

The loss of supply that could result from the resumption of Trump's sanctions against Iran would exceed the capacity of the reserve to be delivered

Insufficient Petroleum Reserve

At the end of three months, the SPR would not have been able to cope with the oil loss due to Iraq's invasion of Kuwait in 1990. After four months, it will not be able to bear the losses of sanctions against Iran

It seems perverse to attack President Trump's ally against Iran and the only source of unused capacity in the world. world, while initiating the biggest break in supply in nearly 30 years. But attacking the allies and destabilizing the markets seems to be a favorite pastime in Washington these days.