How much does Opec matter? This might appear a strange question to ask of the 12 countries who jointly possess about 80 per cent of the world’s known oil reserves, but the recent volatility of the oil market suggests the club may count for less than you might think.
Since the beginning of this month, oil prices have risen from about $83 per barrel to $89 before falling back down to $82. These swings had little to do with the availability of oil on the physical market and everything to do with speculative trading on the paper market, influenced by factors like the decline of the dollar and the Irish debt crisis. Opec has been little more than a bystander during this month’s rollercoaster ride.
Opec can, of course, exert a unique influence over the oil market when its 12 members stand together and reduce or increase their production quotas. Saudi Arabia, the de facto leader of the club, has a unique ability to support or reduce the price by using its spare capacity to vary output levels.
But this does not happen very often. The last time that Opec made a decisive intervention in the oil market was in December 2008 when the club reduced production by 4.2m barrels per day, thereby causing the price to rise from some $40 per barrel to stabilise above $70.
On a day to day level, however, the paper market in oil appears to exerts a greater influence over prices than any decision taken by Opec members. And the club is not very good at enforcing its own quotas. Abdalla El-Badri, Opec’s secretary general, says that compliance with the output cut agreed in 2008 averaged 61 per cent this year. It currently stands at only 55 per cent. The latest oil report from the Centre for Global Energy Studies in London finds that not a single Opec member is currently abiding by its agreed production limit. In the case of Nigeria, the worst offender, the overproduction is almost 700,000 barrels per day. This does not say much about the club’s credibility.
While visiting London on Monday, Badri told the FT he was “not happy” with the present level of compliance, adding: “I know it’s a sovereign business of each country, but we are here to take a decision and everybody should abide by it. And when you want to change it, we have to change it together.”
Meanwhile, he warned that over-the-counter trading threatens to “dominate” the oil market. Unable to enforce discipline on its members within – and buffeted by speculative tides from without – Opec looks less mighty than in the past.