:max_bytes(150000):strip_icc()/shutterstock_293011094-5bfc3d10c9e77c0026b965c2.jpg "How OPEC (and non-OPEC) production affects oil prices")
Crude oil occupies a prominent position in the global commodity market because oil price changes affect the global economy. So, those countries or groups that produce crude oil also affect economies worldwide.
Oil prices are largely dependent on two factors: geopolitical developments and economic events. These two variables can lead to changes in oil demand and supply levels, driving oil price fluctuations from one day to the next. For example, the 1973 Arab oil embargo, the 1980 Iran-Iraq war, the 1990 Gulf War, the Asian financial crisis of 1997 and the global financial crisis of 2007 to 2008 are some of the historical geopolitical developments that significantly affected oil prices. .
Key Takeaways:
Understanding OPEC and oil prices
Organization of the Petroleum Exporting Countries (OPEC) is an organization that sets production targets among its members to manage oil production. OPEC member countries produce about 40% of the world’s crude oil. Additionally, OPEC’s oil exports represent about 60% of the total petroleum traded internationally, according to the United States Energy Information Administration.
Because of this market share, OPEC’s actions have a major influence on international oil prices. In particular, OPEC’s largest producer of crude oil, Saudi Arabia, has the most frequent effect on oil prices. Historically, crude oil prices have seen increases at times when OPEC production targets are being reduced.
The impact of OPEC and OPEC+ on oil prices
Countries involved in global oil production are either members of OPEC, OPEC+, or non-OPEC countries. OPEC has 12 members: Algeria, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates and Venezuela.
Ten non-OPEC countries joined OPEC to form OPEC+ at the end of 2016 to have more control over the global crude oil market. These countries were: Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan. Not surprisingly, OPEC+ has a level of influence over the world economy that is even greater than OPEC’s.
In response to the highly dynamic economic and geopolitical developments, these groups are making changes to their oil production capabilities, affecting oil supply levels and resulting in oil price volatility.
OPEC’s control of the market
OPEC’s oil exports account for approximately 60% of the total petroleum traded worldwide. OPEC reports that as of 2022, 79.5% of the world’s proven crude oil reserves lie within the borders of the OPEC countries. Of that, approximately two-thirds lie within the Middle Eastern region.
In addition, all OPEC member countries have continuously improved technology and improved exploration leading to further improvements in their oil production capacity at reduced operating costs.
Saudi Arabia
Within the OPEC group, Saudi Arabia is the largest crude oil producer within OPEC and remains the most dominant member of the organization. It is also the leading exporter of crude oil worldwide. Every time there is a cut in Saudi oil production, there is a sharp rise in oil prices, and an increase in Saudi oil production stimulates a drop in oil prices.
Since the 1973 Arab oil embargo, Saudi Arabia has managed to call the shots when it comes to oil prices by controlling supply. All major oil price swings in recent history can be attributed to changing production levels in Saudi Arabia, along with other OPEC countries.
The 15 largest oil exporters and the 15 largest oil producers in the world for 2021 Top 15 oil exporters (2022) Country US$ Billion % of world total OPEC/Non-OPEC/OPEC+ Saudi Arabia 224.8 16.7% OPEC Canada 120.5-8.9% Non OPEC Russia 119.5 8.9% OPEC+ United States 117 8.7% Non-OPEC UAE 112.7 8.4% OPEC Iraq 82.3 6.1% OPEC Norway 57.8 4.3% Non-OPEC Kuwait 54.3 4.0% OPEC Nigeria 3279% OPEC Angola 37.4 2.8% Non-OPEC Kazakhstan 35.4 2.6% OPEC+ Oman 33.2 2.5% OPEC+ Libya 31.9 2.4% OPEC Mexico 31.8 2.4% OPEC+ Top 15 oil producers (2022) Million barrels per day/OPECn Total United States OPEC/OPECn % of World 17.8 18.9% Non-OPEC Saudi Arabia 12.1 12.9% OPEC Russia 11.2 11.9% OPEC+ Canada 5.6 5.9% Non-OPEC Iraq 4.5 4.8% OPEC China 4.1 4.4% No -OPEC UAE 1.4 OPEC UAE 34. 3.3% Non-OPEC Kuwait 3.0 3.2% OPEC Mexico 1.9 2.1% OPEC+ Norway 1.9 2.0% Non-OPEC Kazakhstan 1.8 1.9% OPEC+ Qatar 1.8 1.9% Non-OPEC Algeria 1.5 1.6% OPEC
Source: Worlds Top Exports (exporters) and Visual Capitalist (producers)
OPEC+
OPEC+ (including core OPEC) controls nearly 50% of global oil supplies, according to Tamas Varga, senior analyst at PVM Oil Associates and cited by CNBC. OPEC+ remains influential due to three primary factors:
An absence of alternative sources equal to its dominant position. A lack of economically viable alternatives to crude oil in the energy sector. The relatively low-cost price advantage versus the relatively high-cost non-OPEC production.
In short, OPEC+ has the economic ability to disrupt or enhance the supply of oil to significant levels at any time, severely affecting oil prices. For example, the 1973 Arab oil embargo by OPEC quadrupled prices from $2.90 to $11.65 per barrel, and more recently the sudden increase in production by Saudi Arabia in March 2020 due to a price war with Russia led to a sharp decline in the price of oil. On April 20, 2020, following production increases by both nations combined with the decrease in demand due to the Covid-19 shutdown, the front month May 2020 West Texas Intermediate (WTI) crude contract fell by $55.90 for the session to finish. at negative $37.63 a barrel on the New York Mercantile Exchange. This suggests that holders of oil had to pay to get buyers for their production.
101.9 million
The approximate number of barrels of oil consumed daily in 2023 around the world.
The impact of non-OPEC production on oil prices
Non-OPEC oil producers are crude oil producing countries outside the OPEC group. Interestingly, some of the top oil producing countries are non-OPEC countries. This includes the United States of America, which is the number one producer, as well as Canada and China. Some non-OPEC countries such as the United States and Canada are significant shale oil producers.
Most non-OPEC countries have high consumption levels and therefore limited capacity to export. Many are net oil importers despite being high producers, meaning they have minimal influence on oil prices. However, with the discovery of shale oil and shale gas, non-OPEC oil producers, especially the United States, have recently enjoyed increased production and increased market share. Although it was a game changer of sorts, shale oil technology requires significant upfront investment, which acts as a deterrent to shale oil producers.
So far, the jury is out on whether non-OPEC producers can have a material impact on the price of crude oil. High production levels from non-OPEC members from 2002 to 2004 and in 2010 did not result in price declines and instead coincided with higher oil prices. This is probably because non-OPEC members did not have sufficient market share to influence the market price of oil. However, high production from 2014 to 2015 caused prices to drop. Market experts opined that the drop in prices was likely due to an increase in supply from OPEC producers to counter the threat posed by non-OPEC producers to their hegemony.
OPEC and non-OPEC countries against market forces
Oil prices are also influenced by geopolitical developments and economic interests. Additionally, “black swan” events, or unexpected occurrences, greatly affect the supply/demand paradigm.
One such event occurred in the first months of 2020 when oil prices fell to historic lows. First, disagreements within OPEC+ led to Saudi Arabia and Russia both increasing production and engaging in a price war for market dominance. This overt attempt to capture market share led to a rapid decline that sent the price of WTI over $20/barrel. Then came the COVID-19 pandemic and demand for oil was suppressed. The combination of these two events briefly pushed prices into negative territory.
In response, OPEC and its OPEC+ partners (mainly Saudi Arabia and Russia) reached an agreement to cut production by about 10 million barrels per day (B/D) for two months with a gradual return of production in the subsequent months. In what was a classic buy-the-rumor-sell-the-fact trade, oil prices rose a bit and then fell as the market was unimpressed by a supply cut of 10 million B/D, while global demand expected by 30 million B/D.
What is OPEC?
Organization of the Petroleum Exporting Countries (OPEC) refers to a group of 12 major oil exporting countries. Founded in 1960, OPEC aims to manage the supply of oil in an attempt to fix market prices, avoiding fluctuations that could affect the economies of oil-producing and oil-buying countries. The member countries of OPEC are Iran, Iraq, Kuwait, Saudi Arabia and Venezuela (the five founders), plus Algeria, Congo, Equatorial Guinea, Gabon, Libya, Nigeria and the United Arab Emirates. In late 2016, 10 non-OPEC countries joined OPEC to form OPEC+, creating a broader coalition with even more control over the global crude oil market.
What factors affect oil prices?
The price of crude oil can fluctuate significantly in response to many variables. Supply and demand outlook along with the perceived risk of market disruption is a big part of the picture. Periods of economic growth tend to increase oil demand and drive up prices, while economic slowdowns can send oil demand and prices down. OPEC and OPEC+ also influence oil prices by affecting global supply through the negotiation of production quotas.
The Bottom Line
The dynamics of the oil economy are complex, and oil prices depend on more than the rules of supply and demand, although the market at its most primary level is the final arbiter of the price of oil. Under normal world market conditions, OPEC+ will continue to maintain its dominance in oil price setting. Despite challenges such as fracking technology and oil discovery in non-OPEC regions, OPEC’s share of the world market allows the organization to manipulate production quotas and still be a central player in oil price determination.
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