When OPEC met on 27th November they decided to leave production unchanged and to not meet again until June 2015. This at a time of volatility in oil markets and plunging price that leaves many OPEC member states facing budget deficits, some large and unmanageable.

In this post I take a look at the oil production and consumption history of OPEC and find that historically OPEC has been as much controlled by markets as to be in control of them.

Figure 1 Oil production data for OPEC member states. Indonesia and Gabon have both left OPEC. The situation in 1998 was very similar to that in 1973 (see text for details). The $1000 question is whether 2014 is reminiscent of 1979?

Data

There is no satisfactory, easily accessible complete data set for OPEC oil production and consumption. The EIA archives begin in 1980, a bit too late to be helpful. The IEA data I have were transcribed from the monthly Oil Market Reports by Rembrandt Koppelaar and begin in 2002. The BP data begins in 1965 providing the longest time series and reports production for all OPEC countries. But does not report oil consumption for 5 countries – Iraq, Libya, Nigeria, Angola and Gabon.

BP report annual crude+condensate+natural gas liquids (C+C+NGL) and I elected to use this data since it is easy to use, even although it is incomplete. Oil exports are deduced from the difference between reported production and consumption which is an imperfect approach.

History

OPEC (the organisation of the petroleum exporting countries) was founded in 1960 by Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. They were soon joined by several other countries and the membership today is twelve strong. Countries have come and gone, most notably Indonesia in 2009 since it became an importing country in 2003. Gabon left in 1995.

OPEC first flexed its muscles in 1974 in response to “western” assistance given to Israel during the Yom Kippur War of 1973. This sent the oil price sky rocketing from $17 (1973) to $55 (1974) (all prices adjusted to $2013). Surprisingly, OPEC at this time, did not cut production and the punishment was delivered by an oil embargo. But up until 1973, OPEC had been expanding production year on year to meet growing global demand. In 1974, production was not increased and was held constant for the following six years supporting the artificially raised price (Figure 1).

The second oil shock of 1979 actually had nothing to do with OPEC but was caused by the Iranian Revolution that sent the price up from $50 in 1978 to $101 in 1979. Careful examination of Figure 1 shows a slump in Iranian production from 1978 through 1979 and 1980. This was initially partially offset by increased output from OPEC who at this time wanted to protect their markets from over priced oil. The price remained over $100 in 1980 but it then turned downwards, partly in response to the recession caused by the high price and to new supplies that were coming on stream all over the world, most notably in the North Sea and Alaska. Sound familiar?

1980 marked the end of oil shock era and the beginning of an 18 year bear market for the oil price that would collapse to $31 by 1986 and carry on down more slowly to $18 by 1998, actually spending some time below $10 that year. From 1979, with prices collapsing, OPEC cut production dramatically for 6 successive years without managing to halt the slide. But then in 1986 OPEC increased production, precipitating the final price rout. From then on, OPEC began to exert control over the oil market rebuilding market share despite prices that continued to slide. Sound familiar? By 1998, OPEC production had returned to 1979 levels and the price had almost returned to pre-1974 levels. Market equilibrium had been restored.

The nadir of 1998 was a bleak time for the oil industry. I was running a small service company at the time and remember it well. This was pre-information age era. Few of the people I knew in the industry then understood what had just happened and even fewer imagined what was to follow. Enter the era of mega-mergers.

1998 marked the beginning of the great oil bull run that would see daily price peak at $148 in 2008 and the annual price peak at $115 in 2011. This bull run was not caused by OPEC manipulation of events or war but by a simple supply and demand dynamic where rising price has maintained market equilibrium.

Standing back to look at Figure 1 we see some remarkable similarities between the situations in 1973 and 1998. OPEC had just increased production significantly to over 30 Mbpd in each case. The oil price was chronically weak in each case. And in each case in the following years OPEC maintained constant production and the price soared. The situation today is not identical to 1979 but it does rhyme. This time OPEC market share and oil price are not at risk from new giant fields like Prudhoe Bay, Brent and Forties but from US shale oil.

Consumption and Exports

While many oil watchers will be familiar with the roller coaster OPEC production data, less are familiar with the monotonic rise of OPEC oil consumption (Figure 2), especially in the big population countries: Saudi Arabia, Iran, Venezuela and Indonesia – the latter leaving OPEC when consumption overtook production in 2003. For the eight OPEC countries with data, consumption was 1 Mbpd in 1965 and has grown to 8 Mbpd in 2013.

Figure 2 A common feature of oil producing nations is a thirst for oil. OPEC is no different and has witnessed soaring consumption as prosperity and populations have soared. No data for Iraq, Libya, Nigeria, Angola and Gabon.

Figure 3 Because of rampant home demand (Figure 2) oil exports from selected OPEC countries are in decline, a trend that is expected to continue. No data for Iraq, Libya, Nigeria, Angola and Gabon.

Despite raising production to meet rampant demand since 2005, rampant home consumption has meant OPEC exports (selected countries) going into slow decline (Figure 3).

The End of OPEC?

OPEC has had a huge influence on global oil markets and thereby the world economy, but as shown here has been buffeted around by market events as much as it has managed to control them. We have entered a new period of uncertainty.

The organisation can be divided into three groups of countries: 1) the dysfunctional – Iraq, Iran and Libya where future production is just as likely to be controlled by politics than by design: 2) the declining countries – Algeria, Nigeria, Angola and Venezuela where resource exhaustion has sent production of conventional crude into reverse (Figure 4) and 3) the super wealthy gulf states – Saudi Arabia, Kuwait, UAE and Qatar where production is still rising to cover for falls else where (Figure 1). How long this can go on for is anyone’s guess. The power of OPEC will increasingly be placed in the hands of these countries who have the capacity to increase production and the wealth to withhold it as they see fit. The other countries are along for the ride.

Figure 4 Just because a country exports oil does not make it immune to the resource depletion that causes production to peak and then decline as observed in many countries around the world. These four countries have all experienced production decline in recent years. This is not necessarily terminal for these countries, but low oil prices will likely accelerate this process.

The press release from the 166th meeting is worth reading and this paragraph caught my eye:

Recording its concern over the rapid decline in oil prices in recent months, the Conference concurred that stable oil prices – at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand – were vital for world economic wellbeing. Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30.0 mb/d, as was agreed in December 2011. As always, in taking this decision, Member Countries confirmed their readiness to respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.

This pretty well sums up the OPEC conundrum. But note the closing sentence. They have elected to take no action but reserve the right to act nonetheless. Expect to see the super wealthy group of gulf producers cut production well before June 2015.