Last week, OPEC decided to leave its production ceiling unchanged at 30 million barrels per day (bpd), the target it set two years ago. On the face of it, this decision seems to reflect the self-proclaimed oil cartel’s satisfaction with current high oil prices. Over the past three years, OPEC has thrived with Brent crude averaging above $100 a barrel, boosting members’ revenues to record highs. High prices have even allowed the Vienna-based organization to become sloppy: OPEC stopped publishing individual country quotas five years ago, and most cartel members are producing all the oil they can; meanwhile, Saudi Arabia and its Persian Gulf allies are adjusting supplies as they see fit.
In reality, OPEC’s inaction masks its members’ inability to agree on a strategy to avert the threat of a widely anticipated supply glut in world oil markets. Below the surface, there is a slow buildup of both external threats and internal tensions that could create a perfect storm for the oil exporters’ club in the coming months and years. The rise in unconventional oil and gas production, but also the growing liquefied natural gas trade and the shift to renewables, are creating a challenging set of market conditions for OPEC. Meanwhile, the prospect of loosening sanctions on Iran and restoring Iraqi and Libyan production threatens other members’ market share, stirring internal tensions.
While OPEC still sits on almost three-quarters of the world’s conventional crude reserves, external shifts in global energy markets are threatening to push OPEC’s oil out of the market. Biofuels, oil sands and deep-water fields could add additional supply streams to the world oil market. Yet the most significant development is probably the surge in U.S. unconventional oil and gas. According to the International Energy Agency (IEA), the U.S. is on track to overtake Saudi Arabia as the world’s biggest oil producer by 2015. Equally important, U.S. consumption of petroleum products has continued to fall from its peak in 2005 as cheap and abundant shale gas comes online and begins to make inroads into the transport sector.