The Future of OPEC

My Comments: In part this is a follow up to the posts about the US-Iran deal recently completed. What is often not seen or talked about is our increasing lack of dependance on Middle East oil. That dependency has been the reason for our friendship with Saudi Arabia. This despite where most of the 9/11 hijackers came from: Saudi Arabia. This rapidly changing dynamic will have huge implications for the US and the rest of the ‘western’ world before the end of this decade.

And by extension, where you will invest your money to realize the best return for your retirement accounts , etc.

Summary
The prospect of revitalized oil production in Iraq and Iran may add to tensions between those two countries and Saudi Arabia over export quotas. On Dec. 4, representatives of the Organization of the Petroleum Exporting Countries (OPEC) will meet in Vienna to discuss a number of topics. OPEC is facing two challenges. First, OPEC’s historically biggest consumer — the United States — is rapidly increasing its own domestic production. At the same time, OPEC must deal with plans to expand oil production envisioned both by Iraq and Iran, which could lead to lower prices than the cartel desires. Ultimately, however, emerging markets in Asia will set global demand, and their energy thirst will determine the scale of the problem OPEC faces.

Analysis
OPEC was organized in the early 1960s by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela with the primary goal of unifying the five countries’ oil export policies — and hopefully dictating a high price for their oil. The five countries certainly possessed that power when the cartel was initially formed, and while the cartel still produces about 40 percent of the world’s oil, OPEC’s dominance has declined over the years. Today, only Saudi Arabia and to a certain extent the United Arab Emirates, Qatar and Kuwait retain the ability to voluntarily adjust production levels. OPEC’s other members — Indonesia, Libya, Algeria, Nigeria, Ecuador, Gabon and Angola — must maintain production to finance their national budgets. Effectively, this means that OPEC wields nowhere near the power it once did. Even a producer of Saudi Arabia’s size is barely able to change the price of oil through boosting or cutting production.

A new wave of oil production outside the cartel has already hit. Production in the United States has increased to an estimated 8 million barrels per day — the highest level since the 1980s. Elsewhere, production is set to take off in Canada and potentially Brazil. At the same time, increased production outside OPEC is dwarfed by the ambitious expansion plans put forward by OPEC members Iraq and Iran. While production outside the cartel is manageable, together with Iraq and Iran’s plans it could represent a significant threat to oil prices in the latter half of the decade.
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