OPEC - Why it no longer calls the shots

"Are you nuts?" might be the first response of anyone who sees the title. Afterall everyone knows that the single factor which definitely affects the spot price of an Oil barrel on the floor of the NYMEX, the most, is an OPEC meeting. So let me elaborate. OPEC is powerful, but not as much as it once used to be. If anyone remembers the 1973 Oil shock - which brought America and most of the world to its knees in a decade long bout of stagflation, you will now know how much less power it wields today.

So what can be the reasons for such a powerful body's influence to wane? To understand the reasons, you need to understand the composition of OPEC. OPEC stands for Organization of Petroleum Exporting Countries. It is a cartel of 12 countries, the main member being Saudi Arabia accounting for over 25% of world reserves. Other countries like Venezuela have much smaller reserves. So now lets take a look at some of the reasons for the waning of its effects.

Production: Although OPEC used to control a lot of Petroleum production, New reserves discovered in the Gulf of Mexico, and Russia opening up its vast Oil reserves have reduced OPEC's global output to under 40%.

Price Issues: OPEC members have divided interests over Oil prices. While the naive reader might think that a higher price is in the best interests of all suppliers, things are more complicated. Saudi Arabia has much more Oil in the ground compared to other members of OPEC. So while a higher price helps in the short term, it will also accelerate development of alternative technologies, which will eventually reduce the world dependence on Oil. So OPEC members with less Oil in the ground, could not care less about the future, and want to make more money with less oil, and hence want higher prices. Saudi Arabia, on the other hand, wants the world to continue its addiction with oil, and hence would not want to invariably prop up alternative fuel technologies. This attitude is summed up by a quote by a Saudi Oil Minister as "The stone age didn't end because we ran out of stones". Even towards the end of 2008, Saudi broke ranks, and declared it will pump over its OPEC imposed production quota, to reduce the Oil prices which were in the stratosphere.

Infighting: Also after a great show of unity in the 1970s, the major OPEC nations turned against one another. Firstly the 8 year Iran-Iraq war distanced the Shia Iran from the rest. Later, Iraq which was trying to service its war debts more easily by rising Oil prices was rebuffed by Saudi and Kuwait which pumped out more Oil and depressed global Oil prices, finally provoking Iraq to invade Kuwait and eventually Saudi, if it were not for America's intervention.

The Iraq Factor: Although Iraq is a member of OPEC, it is not taking part in production quotas since 1998. And with the highly increased American influence, it is much more likely to do US's bidding at least in the near future, which most probably will not coincide with the official OPEC stand. Also after a long time, Iraq is comparatively stabler and will start pumping more and more Oil, increasing supply and indirectly reducing OPEC's influence.

America: And finally lets not forget US's Gunboat diplomacy by having a couple of warships and aircraft carriers patrolling the Gulf. Although Saudi is an ally, the war ships let it know its position, and the emergence of a Shia Iran, right next to its borders as well as a discontented population, rising Islamic terrorism against the ruling sheiks would make Saudi more reluctant to anger it ally America. And America is much more interested in the Gulf after the 1973 Oil Shocks.

These are some of the reasons why OPEC is less powerful, but lets not get carried away, It is still the single most powerful factor in determining global Oil prices. So let us hope that the dependence on Oil will decrease soon enough.