Discipline within the OPEC cartel is deteriorating, and its interventions are proving ineffective. Riyadh is adopting a new strategy and is well-prepared for a competitive struggle.
Saudi Arabia produces its oil at very low costs.
If the aim of a cartel is to maintain an artificially high price, then the OPEC+ alliance is currently failing. The coalition of the Organization of the Petroleum Exporting Countries (OPEC) and allied oil producers like Russia and Kazakhstan have significantly cut production since late 2022 to stabilize the price of oil, a key component of the global economy.
However, Brent crude oil now trades at around $71 per barrel. This price is more than 20 percent lower than in September 2023 and is near its lowest level in three years. This decline is beneficial for the struggling global economy, which is trying to recover. Additionally, concerns regarding the economic situation in Europe, the USA, and particularly China, are also dampening oil demand, contributing to the price weakness.
Unity is no longer the mantra
Consequently, the supply remains high, as oil-producing nations outside the alliance, notably the USA, Canada, and Brazil, are producing substantial amounts of oil. Within the OPEC+ alliance, there are also members who exceed their allotted production quotas: Kazakhstan, Russia, and particularly Iraq.
Given that the cartel’s efforts are failing, the prevailing attitude appears to be shifting from “Together we are strong” to “Every man for himself.” Saudi Arabia, the largest producer in the world, is expected to increase its production starting in December. The strategy in Riyadh is clear: if the price cannot be maintained, perhaps market share can be protected. Other nations may follow suit, provided they do not excessively reduce prices in the process.
When it comes to the crunch, Saudi Arabia holds the strongest cards. No other country can produce oil at such a low cost as this desert nation. If an oversupply leads to a price crash, Riyadh can weather the storm due to its financial reserves while driving its competitors out of the market.
According to analysts at Bernstein Research, the kingdom aims to be the “last man standing.” A decade ago, Saudi Arabia used this approach to maintain its market share against the rapidly expanding shale oil production in the USA, causing prices to plummet to below $30 a barrel.
Maintaining discipline is the hardest part
It is now likely that Saudi Arabia will increase production even if Kazakhstan, Russia, and Iraq do not adhere to their promised production cuts. They had initially supported these cuts precisely because they led to greater output than permitted within the alliance. The complex framework of allowed production quotas, designed by OPEC+ to satisfy all members’ interests, was intended to stabilize overall supply.
However, Russia, for instance, must finance its aggressive war and therefore needs consistent income. In any cartel, maintaining discipline becomes increasingly challenging when the hope of sharing future growth turns into a struggle for self-preservation, as noted by Bank of America. Moreover, outside OPEC+, oil production is expected to increase significantly in the next five years, anticipated to satisfy over 80 percent of the projected growth in demand, according to analysts.
OPEC Discipline Deteriorating: Saudi Arabia’s Strategic Shift
Current State of OPEC+ Cartel
If the purpose of a cartel is to keep a price artificially high, then the OPEC+ alliance is currently doing a bad job. The alliance of the Organization of the Petroleum Exporting Countries (OPEC) and allied oil producers such as Russia and Kazakhstan have cut production sharply since the end of 2022 to support the price of the global economy’s lubricant.
However, Brent crude oil now only costs around $71 per barrel. The price is over 20 percent lower than in September 2023 and is close to its lowest level in three years. This downturn pleases the global economy, which is currently struggling to find its footing. Concerns about the economy in Europe and the USA, and recently in China in particular, are also dampening demand for oil, contributing to the downward pressure on prices.
Strong Together No Longer Applies
In return, the supply is quite large, with producing countries outside the alliance contributing significantly—especially the USA, Canada, and Brazil. Within the OPEC+ alliance, dissenters like Kazakhstan, Russia, and especially Iraq are also violating agreed production cuts.
As the effectiveness of the cartel’s measures wanes, the sentiment seems to be shifting from “Together we are strong” to a more self-preservational mantra: “Save yourself if you can.” Saudi Arabia, the world’s largest oil producer, is expected to ramp up production from December, signaling a potential strategy shift. The calculation in Riyadh is clear: if the price cannot be upheld, perhaps market share can be defended instead.
Other countries may follow suit, increasing production as long as it doesn’t drive prices down too drastically.
Financial Resilience of Saudi Arabia
When needed, Saudi Arabia holds a significant advantage with its low production costs. If overproduction causes prices to plummet, Riyadh can withstand the financial strain longer than its competitors, effectively using its substantial reserves to outlast them in a cut-throat market.
Analysts at Bernstein Research opine that Saudi Arabia could adopt a “last man standing” strategy similar to what it did a decade ago against the rise of shale oil production in the USA, when a surplus led to oil prices falling below $30 a barrel. This method may be revisited if Saudi Arabia decides preserving its market share is more important than the immediate financial gains from higher prices.
Challenges for OPEC+ Unity
As the situation continues to evolve, it’s crucial to recognize that Saudi Arabia may increase its output even if other members like Kazakhstan, Russia, and Iraq fail to restrict production as promised. These countries had advocated for production limits due to their own concerns about overproduction, but ultimately many have produced more than agreed.
With the complexities of permitted production quantities under OPEC+ regulations intended to satisfy all members’ interests, maintaining a stable overall supply has become increasingly difficult.
Escalating Competition Beyond OPEC+
In addition to internal dissent, external pressures complicate OPEC+’s efforts. The projected rise in oil production—mainly from the U.S., but also from Brazil and Canada—could potentially cover more than 80% of the expected growth in demand over the next five years. As noted by Bank of America, this creates significant challenges in maintaining the discipline needed to keep prices stable across the alliance.
Implications for Global Oil Prices
The internal strife within OPEC+ and the external competitive landscape suggest that global oil prices may remain under pressure. The collective inability to enforce production cuts effectively could lead to a surplus, pushing prices down further and encouraging a market that is saturated with oil from non-OPEC countries as well.
Real-World Case Studies of Market Maneuvering
- Case Study 1: U.S. Shale Boom – The rapid expansion of shale oil production in the U.S. forced OPEC to reassess its pricing strategies as it struggled to contain the influx of cheaper oil into the market.
- Case Study 2: Russia’s Production Strategy – Russia’s need to finance its geopolitical ambitions often conflicts with OPEC’s production agreements, highlighting the difficulty of maintaining unity in a politically diverse grouping.
Long-term Outlook for Oil Producers
The evolving landscape suggests that without a robust mechanism for compliance and accountability, OPEC+ may continue to struggle to influence the global oil market effectively. The shift in strategy from maintaining price stability to defending market share reflects a fundamental change in how member countries view their roles and responsibilities within the cartel.
Saudi Arabia’s emphasis on low-cost production provides a competitive edge in a potentially crisis-driven market, as it’s better poised to withstand fluctuations than many of its peers.
| Country | Production Cost (per barrel) |
|---|---|
| Saudi Arabia | $10 – $15 |
| Russia | $20 – $30 |
| U.S. Shale | $40 – $60 |
| Canada | $30 – $40 |
Conclusion
The dynamics within OPEC+ and the broader oil market reflect pressing challenges as the global energy landscape continues to shift. The focus on market share protection over price stability may redefine the interactions among member states while producing countries outside the cartel amplify their roles, presenting both risks and opportunities for international stakeholders.
