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Imagine a world without OPEC. It isn`t paradise

Source: Bloomberg News, 23/07/2018

Imagine a world without OPEC. This is what the sponsors of legislation
introduced in both houses of Congress seem to want. Versions of the
`No Oil Producing and Exporting Cartels Act`, or the NOPEC bill, are
working their way through the Senate and the House of Representatives,
and are likely to find much more support from the White House than
they have in the past ï¿½` Presidents George Bush and Barack Obama both
threatened to veto similar legislation.
The bill would allow US antitrust laws to be enforced against OPEC
members whom the sponsors say have `used production quotas to keep oil
prices artificially high`. This is a popular argument in a country
where the right to cheap gasoline might have been written into the
constitution alongside the right to bear arms, had that document been
drafted a couple of hundred years later than it was. But we need to
look a bit further than the gas station forecourt. And when we do, we
will not be looking upon the promised land.
OPEC introduced production quotas in 1982, to allocate output between
member countries faced with a third year of falling global oil demand
and rising supply from countries like Mexico and India, which left
them with as much as 12 million barrels a day of spare capacity. Saudi
Arabia had already reduced its oil production by 30% and, just as in
2016, was no longer prepared to shoulder alone the burden of balancing
oil supply and demand.
What would have happened if OPEC hadn`t got together? Sure, drivers in
America and elsewhere would have enjoyed cheaper gasoline for a while.
But probably not for too long. Even with the groupâ€™s supply
management, oil prices reached a low of around $14 a barrel in 1986,
according to data from BP.
How much further would they have fallen if member nations had
continued to produce without restraint? Certainly low enough to make
production uneconomic in Alaska, the Gulf of Mexico, the North Sea,
Western Canada and a host of other oil provinces that have become
mainstays of non-OPEC production. The groupâ€™s supply management
created the space for 33 billion barrels of additional non-OPEC
production in the 20 years it took for them to get their supply back
to the level it had been in 1978.
But nearly 40 years later, the world`s a different place. Here is what
would happen if the NOPEC bill became law and the group failed to
protect itself from its reach. This would be the world without OPEC.
There could be no collective action to try to balance oil supply and
demand. Saudi Arabia has said repeatedly that it wouldn`t balance the
market on its own and support high-cost oil producers.
You don`t have to search too far to see what that means in practice.
Just cast your mind back four years, during the thick of OPEC`s
pump-at-will policy. Oil prices fell to $26 a barrel ï¿½` great for
drivers, but not so good for the US oil patch, or for investment in
future production capacity needed to offset natural decline in
existing fields.
As Saudi Arabia raised its production, the number of rigs drilling for
oil in the US fell by 80%. The only region in the world where drilling
didn`t drop was the Middle East. It wasn`t long before there were
calls, including from candidate Trump`s energy adviser, for OPEC to
act to reduce supply and rescue prices that were too low for the
American shale industry.
If the NOPEC bill becomes law, thereâ€™s little incentive for anyone to
hold spare production capacity. In recent decades this willingness has
been an important safety valve to relieve the pressure of supply
disruptions. A study by the King Abdullah Petroleum Studies and
Research Center, initiated in 2016, assessed the annual economic
benefit to the global economy of OPEC`s spare production capacity at
between $170bn and $200bn through the reduction in price volatility in
times of supply disruption. Without that buffer, oil prices could have
spiked above $300 a barrel during the Libyan revolution, the study found.
The biggest consumer-held oil stockpile ï¿½` the US Strategic Petroleum
Reserve ï¿½` could not have coped with the loss of supply that
accompanied Iraq`s 1990 invasion of Kuwait, and it would have
struggled to offset the loss of Libyan production in 2011 for more
than five months. The loss of supply that may result from Trumpâ€™s
revival of sanctions against Iran would exceed the reserveâ€™s ability
to deliver within four months.
It seems perverse to be attacking President Donald Trumpâ€™s ally
against Iran and the world`s only source of spare capacity, while
simultaneously initiating the biggest supply disruption in nearly 30
years. But attacking allies and destabilising markets seems to be a
favorite pastime in Washington these days.

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