The Organization of Petroleum Exporting Countries, OPEC, was formed in 1960 to take control of oil production and regulate global oil prices. Since then, the organization has been playing an active role in managing oil production and regulating oil prices. Currently, the organization produces 40% of the world’s oil and has 80% of the global oil reserves.
The organization coordinates and unifies the petroleum policies of its member countries. The idea behind its inception was to stabilize the oil prices and ensure a steady oil supply to consumers and returns to the suppliers. Before OPEC, seven western oil companies (seven sisters) controlled more than 90% of oil output.
Over the years, OPEC exhibited its dominance in many forms. The organization manipulated oil prices by regulating the supply of oil. For example, if the prices soar, it cuts the supply by reducing production. Similarly, if the prices rise, it enhances production. Then, in 2016, OPEC + was also formed, which included ten non-OPEC nations to exert OPEC’s influence on global oil prices.
Now, imagine if all this does not exist. How would the world economy look if there was no OPEC to regulate oil prices?
Let’s find out.
Imagining World Economy Without OPEC
Arab-Israel War (Yom Kippur War) and the subsequent OPEC embargo on the USA and other western countries are evidence of the power of OPEC. This embargo surged oil prices and created an acute oil shortage, leading to inflation and an economic crisis in the world. After this, OPEC’s economic and political power grew, and it continued to leverage its geopolitical advantage. The influence of oil-rich nations also grew.
Though US Shale oil production and demand shifted the power dynamics of OPEC countries, regardless of this, OPEC still holds dominance in the world.
A world where there is no OPEC. Perhaps a world where NOPEC legislature finally gets enacted. On a side note, NOPEC (No Oil Producing and Exporting Cartel) was passed two decades back in the USA. The crux of this bill is to prevent OPEC via antitrust lawsuits from controlling oil production.
Now, let’s imagine a world where OPEC does not exist at all, even never existed. Let’s see what the world economy would look like without OPEC.
High Volatility in Oil Prices
Without OPEC, oil prices would become very volatile, even more than they are today. Oil prices would fluctuate with every geopolitical event.
OPEC controls the oil production and supply to regulate oil prices. OPEC has a spare capacity cushion that every member country has to maintain. This spare capacity enables OPEC countries to meet the unexpected rise in demand or cuts in supply. So, for example, if any country’s oil supply gets affected, this supply shortage will be fulfilled by other members by utilizing their spare capacity. This way prices of oil will not be affected during any crisis.
The rise in Brent oil prices in 2012 due to supply disruptions would have been more than what it was if there would have no spare capacity due to OPEC.
Without OPEC, every country would be producing oil at its full capacity. Oil production would be higher with nothing to limit it. Each oil-producing country would decide the price of oil based on its production and consumption. Additionally, any geopolitical event would have a greater effect on oil prices with no spare capacity to fill in the gaps in supply.
Moreover, this volatility in oil prices would make budgeting and planning very difficult for businesses and households.
Cheaper Oil & Increase in Oil Consumption
Without OPEC, all oil-producing countries would be competing against each other. They would sell oil at whatever rates as determined by the production and consumption of oil. The oil prices would plummet significantly with an increase in supply. This drop in prices would further enhance the consumption of oil.
All oil countries would be competing against each other for market dominance by providing more oil at competitive rates. Additionally, there would not be spare capacity available to pump up oil production due to sudden supply shocks.
These drops in oil prices would de-incentivize oil companies to invest in this sector. Many companies would be less interested in the expensive exploration and production of oil due to low margins. It could reduce the employment opportunities and income of countries that depend on domestic oil industries.
With oil becoming cheaper without OPEC, nobody would think about electric vehicles or other “clean energy” sources. The oil reserves will exhaust and deplete faster, with no interest in investing in the exploration and drilling of oil to enhance capacities.
World Economy Without OPEC Would Not Necessarily Be Amazing | Conclusion
We thought the world economy without OPEC would be peaceful and better with more controlled oil prices and the end of oil-rich nations’ dominance. Unfortunately, it is not the case.
The takeaway is that without OPEC, oil prices will become unpredictable, with volatility never seen in the history of mankind. Each country would decide on oil production and prices. Every country would produce excessively by utilizing its full capacity. This will lower oil prices, enhance consumption, and exhaust oil reserves faster with spare capacity to fill the gaps in supply. New entrants would be dis-incentivize to enter this industry with low margins.
What do you think? Should OPEC decide how much oil be sold to us?