On Thursday, the 13-nation Organization of the Petroleum Exporting Countries ended its meeting without reaching an agreement on oil production. Some had hoped OPEC would freeze and lower oil supplies to stabilize prices, but Saudi Arabia’s new oil minister and de factor OPEC leader left supplies unchanged.
The gathering in Vienna received plenty of attention similar to previous ones, but it’s time for the world to stop following OPEC meetings.
The truth is that everyone should have stopped paying attention by late 2014 when it became clear the Saudis and other Arab states would not curtail their own output so as to sustain world oil prices that had soared to over $100 a barrel. The price had risen that far because demand for oil had risen with the growth of China and other emerging energy-hungry economies and because hostilities had disrupted oil supplies from some producing nations.
But the big new actor on the scene was North America. Specifically, the rapid rise of oil production in the United States and Canada, made possible by fracking—the development of new technologies to extract oil out of shale and other “tight” deposits. As a result, the Saudis realized that they would have to continually reduce their own production if shale oil production kept rising to keep the overall world oil supply unchanged. And at prices over $100, it would keep rising.
But if that is the basic story, there are many subplots in this operetta. Oil production from Iran had been curtailed because of embargoes imposed on Iranian output by the major powers of the world due to their renegade nuclear program. However, with a new agreement in place designed to curtail that program, the embargo has been lifted and Iran wants to return production to what it would have been without the embargo — it had been responsible for 11% of OPEC’s production in 2012.
The Arab states want to stabilize all members’ production at around recent levels, while Iran wants to go back to its pre-embargo production. Since many of these countries are mortal enemies on non-oil matters, it will be hard to get agreement on this point. Other complications include the disruptions to supply that arise from political and military conflicts in nations such as Venezuela, Nigeria, Syria, and Iraq. The lack of political stability may have sustained the recent rise in oil prices, but they complicate forecasts for the future.
We are currently living through and learning how U.S. producers will respond to current prices of around $50 a barrel, how they may change output, and whether they can survive at lower prices. Some shale fields are profitable at still lower prices but others are indeed closing down – the Saudis and OPEC have been playing this type of long game.
Farther down the road, what happens to oil prices in the future will determine how much U.S. supply will grow, if at all. And U.S. supply, in turn, will be a big factor determining prices across the rest of the world. If that sounds circular, it shouldn’t. Because shale oil production can profitably be turned on and off much more readily than oil from conventional fields, the world price will be sensitive to how productive this new technology turns out to be.
So the world oil market is likely to be uncertain for some time. OPEC could reduce that uncertainty if its members could agree to collude, as they have in the past. In that regard, it is ironic that the greatest oil fields were discovered in the sands of the Middle East early in the 20th century, and that the oil market still depends so heavily on production from countries that are so politically challenged in spite of their century-long liquid gold bonanza.
Will the Arab states curtail oil production enough to allow Iran to expand its own output at higher prices? Answer that and you can imagine a world with relatively stable oil prices. Now figure out at what price U.S. shale production would stabilize, and you can predict the trend in world oil prices. Or at least what that trend would be absent wars, overthrown governments and the like.
Bottom line: OPEC meetings are not as important as they used to be. They could be, if Iran and the Arabs could make friends, but from what we’ve seen today, we will need plenty of luck.
Editor’s note: This piece originally appeared in Fortune.
Todd Stern speaks at The Economist’s Climate Risks Summit.