Imagine a world without Opec. This is what the sponsors of legislation introduced in both houses of Congress seem to want. Versions of the \u201cNo Oil Producing and Exporting Countries Act,\u201d or the NOpec bill, are working their way through the Senate and the House of Representatives, and are likely to find much more support from the White House than they have in the past \u2014 Presidents George W Bush and Barack Obama both threatened to veto similar legislation.
\nThe bill would allow US antitrust laws to be enforced against Opec members whom the sponsors say have \u201cused production quotas to keep oil prices artificially high.\u201d This is a popular argument in a country where the right to cheap gasoline might have been written into the constitution alongside the right to bear arms, had that document been drafted a couple of hundred years later than it was. But we need to look a bit further than the gas station forecourt. And when we do, we will not be looking upon the promised land.
\nOpec introduced production quotas in 1982, to allocate output between member countries faced with a third year of falling global oil demand and rising supply from countries like Mexico and India, which left them with as much as 12mn barrels a day of spare capacity. Saudi Arabia had already reduced its oil production by 30% and, just as in 2016, was no longer prepared to shoulder alone the burden of balancing oil supply and demand.
\nWhat would have happened if Opec hadn\u2019t got together? Sure, drivers in America and elsewhere would have enjoyed cheaper gasoline for a while. But probably not for too long. Even with the group\u2019s supply management, oil prices reached a low of around $14 a barrel in 1986, according to data from BP Plc.
\nHow much further would they have fallen if member nations had continued to produce without restraint? Certainly low enough to make production uneconomic in Alaska, the Gulf of Mexico, the North Sea, Western Canada and a host of other oil provinces that have become mainstays of non-Opec production. The group\u2019s supply management created the space for 33bn barrels of additional non-Opec production in the 20 years it took for them to get their supply back to the level it had been in 1978.
\nBut nearly 40 years later, the world\u2019s a different place. Here is what would happen if the NOpec bill became law and the group failed to protect itself from its reach. This would be the world without Opec.
\nThere could be no collective action to try to balance oil supply and demand. Saudi Arabia has said repeatedly that it wouldn\u2019t balance the market on its own and support high-cost oil producers.
\nYou don\u2019t have to search too far to see what that means in practice. Just cast your mind back four years, during the thick of Opec\u2019s pump-at-will policy. Oil prices fell to $26 a barrel \u2014 great for drivers, but not so good for the US oil patch, or for investment in future production capacity needed to offset natural decline in existing fields.
\nAs Saudi Arabia raised its production, the number of rigs drilling for oil in the US fell by 80%. The only region in the world where drilling didn\u2019t drop was the Middle East. It wasn\u2019t long before there were calls, including from candidate Trump\u2019s energy adviser, for Opec to act to reduce supply and rescue prices that were too low for the American shale industry.
\nIf the NOpec bill becomes law, there\u2019s little incentive for anyone to hold spare production capacity. In recent decades this willingness has been an important safety valve to relieve the pressure of supply disruptions. A study by the King Abdullah Petroleum Studies and Research Center, initiated in 2016, assessed the annual economic benefit to the global economy of Opec\u2019s spare production capacity at between $170bn and $200bn through the reduction in price volatility in times of supply disruption. Without that buffer, oil prices could have spiked above $300 a barrel during the Libyan revolution, the study found.
\nThe biggest consumer-held oil stockpile \u2014 the US Strategic Petroleum Reserve \u2014 could not have coped with the loss of supply that accompanied Iraq\u2019s 1990 invasion of Kuwait, and it would have struggled to offset the loss of Libyan production in 2011 for more than five months. The loss of supply that may result from Trump\u2019s revival of sanctions against Iran would exceed the reserve\u2019s ability to deliver within four months.
\nIt seems perverse to be attacking President Trump\u2019s ally against Iran and the world\u2019s only source of spare capacity, while simultaneously initiating the biggest supply disruption in nearly 30 years. But attacking allies and destabilising markets seem to be a favourite pastime in Washington these days.<\/p>\n","protected":false},"excerpt":{"rendered":"
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