MarketLine Blog

OPEC: Supply restriction amid global oil glut

OPEC, consisting of 13 oil-rich governments, is the only true cartel allowed, albeit grudgingly, to operate in today’s global economy and it wields considerable power. In 1973 Arab members imposed an oil embargo on the US during the Arab-Israeli war which tripled prices in a matter of months. Three times in recent history OPEC has stepped in to shore up the oil market, and each time prices rallied within days of action being taken. It is fair to say, therefore, that OPEC is a force to be reckoned with.

Or rather, it was.

Since its last production cut in 2008, the group has repeatedly refused to reduce output. Many analysts have seen this as a partial relinquishing of power to the West and a weakening of the bloc, and the most major occurrence of this was its inability to agree on output cuts on Thanksgiving Day, 2014. Oil prices fell $25 per barrel in a matter of weeks, and the industry has suffered ever since. Without the omnipresent interference from OPEC, price levels plummeted and Western producers struggled to make ends meet.

Society has seen a massive shift in the last 20 years. Shunning fossil fuels, the younger generations are becoming increasingly worried about the environment while businesses are beginning to explore the potential in green alternatives like electric cars. The oil industry has long known that its time was limited, and recent bickering between OPEC members seems to indicate growing conflict and desperation in the group. President-Elect Trump has expressed his concerns over his nation’s overdependence on foreign oil, and the rapid growth of the US shale gas industry only serves as another thorn in the side of OPEC.

Supply cuts, and the price growth that will ensue, will primarily benefit the US as one of the world’s top producers. How long OPEC members are able to resist upping production to cash in, however, is anyone’s guess. What is clear is that, until this happens, the US oil industry will continue to grow and rely less and less on Eastern oil. This is something that Saudi Arabia and the rest of OPEC is unlikely to tolerate for long.

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