The difficulty being encountered by the rebalancing program of the Organization of Petroleum Exporting Countries (OPEC) is illustrative of the three essential requirements for the successful operation of an agreement governing world trade in a commodity. The first is the agreement’s encompassing all the significant players in world trade in that commodity. The second is willingness on the part of the agreement’s signatories to faithfully observe its policies and rules. The third requirement is the non-emergence of a viable alternative for the commodity.
The non-fulfillment of these requirements caused OPEC to gradually lose its initial all-powerful position and to become the irresolute, discipline-short institution that it is today. The Vienna-based organization has ceased to be regarded with awe and fear.
OPEC was not the first agreement governing world trade in a commodity. At the time of its establishment in the 1960s there already were the International Sugar Agreement and the International Coffee Agreement, to mention the two most important commodity agreements. But because it dealt with a commodity that lighted up homes, offices and factories and caused transportation and industrial facilities to function, OPEC’s inauguration attracted a greater measure of international interest and attention.
The agency that advises UN members on energy policy, the Paris-based International Energy Agency, reported recently that compliance with production cuts agreed to by OPEC’s members fell in June 2017 to its lowest levels in six months, with several members pumping much more oil than allowed by the organization’s market-rebalancing program. As a result, the rebalancing was delayed, IEA reported.
“For OPEC members who agreed to reduce production by 1.2 million barrels per day (bpd), to see their agreed cut effectively diluted by nearly two-thirds must have been very frustrating, especially as their pact has, hitherto, been well observed (historically),” IEA said.
The level of compliance apparently was 95 percent in May 2017. It dropped to 78 percent due to higher-than-allowed outputs of six member-countries (Algeria, United Arab Emirates, Iraq, Gabon, Venezuela and Ecuador). The strong compliances of Angola, Saudi Arabia, Kuwait and Qatar were thereby negated.
“Each month something seems to come along to raise doubts about the pace of the rebalancing (and) this month there are two hitches, viz., a dramatic recovery in oil production in Libya and Nigeria and (OPEC’s) lower rate of compliance with its own output agreement,” IEA said.
There we have it: some members of an international commodity organization complying with the organization’s directives and other members not complying and oftentimes cheating.
The other major problem faced by OPEC and other international commodity agreements is the degree of their control over the total world production of a commodity. It is very difficult for an international commodity agreement to make its price-influencing policies effective if it a substantial part of world production of the commodity in question is not subject to its control. At the time of its establishment OPEC members controlled over close to 70 percent of world production – as distinct from world reserves – gave it much market clout, but that clout progressively diminished as a steadily increasing volume of non-OPEC oil (from the United Kingdom, Mexico, Malaysia, Russia and the US (Alaska), among others) came into the market. OPEC’s hold on world oil prices is likely to continue to weaken as more discoveries are made in countries like Brazil and Israel. The need for stronger organizational discipline within OPEC’s ranks will become correspondingly greater.
But potentially the greatest game-changer for OPEC is the ongoing change in the energy situations of the world’s two largest economies. With its increasing production of shale oil – oil derived from the shale sands of the Midwest – the US has almost achieved energy sufficiency. The second-largest economy, China, is well on the way to becoming energy-sufficient as a result of its huge investment in solar power and other renewable energies.
Lack of discipline among members, the non-inclusion of producers accounting for a substantial part of total world production of a commodity and the emergence of new and strongly competing alternative products: these are the major weaknesses of international commodity agreements.
And what is in the near-term horizon for OPEC? Says IEA: “The (agreed) cuts have stabilized oil at around $45-50 per barrel, but prices have come under renewed pressure in recent weeks due to growing US output and little evidence of global stocks’ falling from record highs (of more than) 3 billion barrels.”
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