Oil and Petroleum Products | Council on Foreign Relations

OPEC in a Changing World

Western leaders have long criticized OPEC’s power to raise oil prices, and the bloc continues to influence the global market even as U.S. oil production has soared and alternative energies have come to the fore.

Backgrounder by Anshu Siripurapu and Andrew Chatzky Mar 9, 2022

The Russian-Saudi Oil Price War, With Amy Myers Jaffe

Amy Myers Jaffe, CFR’s David M. Rubenstein senior fellow for energy and the environment and director of the Energy Security and Climate Change program, sits down with James M. Lindsay to discuss the standoff between Russia and Saudi Arabia over oil prices.

Podcast by James M. Lindsay and Amy M. Jaffe Mar 24, 2020

China

Can China Become the World’s Clean Energy Leader?

China seems poised to surpass the United States in leading clean energy innovation and climate change response, but Beijing faces internal challenges to energy reform.

Interview with Francesca Regalado and Jennifer L. Turner April 28, 2017
Americas

International Pressure on the Maduro Regime

The Venezuelan constitutional chamber’s decision last week to dissolve the National Assembly has made it abundantly clear that Maduro’s Venezuela is an authoritarian regime. The judiciary is at the beck and call of chavista forces, the military is corrupt and co-opted, and despite a last-minute reversal of the court’s decision, the continued dilution of the Assembly’s powers means that there are effectively no independent institutions left with the power to check the regime. Venezuela, meanwhile, is confronting a humanitarian catastrophe. The regime has run up against the limits of its economic policy: foreign currency is too scarce to cover both debt obligations and desperately needed imports. Three quarters of Venezuelans have lost weight under the “Maduro diet”; more than two-thirds of basic goods are scarce. The regime seems willing to play out the clock, at grotesque human cost, guided by one core strategy: waiting for global oil prices to recover. But the hole is now so deep that a modest increase in oil prices— of the sort predicted for 2017— may be insufficient: debt payments due in 2017 outstrip foreign currency reserves. Dictatorships sometimes crumble under the weight of their own contradictions, and this could yet be the case for Chavismo, given the depth of the crisis. Indeed, the uncertainty generated by the court’s action last week may be a sign of fissures within the regime. But as John Polga-Hecimovich and I noted last year, the Maduro regime has a clear strategy for repressing domestic opposition. Leaders who have mobilized against the regime are in jail. The military is fully in control of food supply and appears united against any regime change that might expose leading officers to prosecution for corruption or human rights abuses. The opposition has been fractured by the regime’s delay tactics, including the simulacrum of negotiations over the past year. Venezuelans are exhausted by the daily search for sustenance which, alongside regime repression, saps their ability to protest. Although Maduro walked back last week’s court decision, he retained the power to negotiate oil deals without congressional approval, a tool which may prove very important. China or Russia could yet help Venezuela out of its hole. But China does not seem eager to play a geopolitical role and it has little to gain from saving a crisis-ridden regime in the Western Hemisphere from seemingly inevitable collapse. Russia, on the other hand, seems to be doing what it can to help Maduro through his hard spell: it is reported to be negotiating loans and further investments by Rosneft that might help the regime through a heavy bout of April debt payments. The region has been slow to respond, but is at last finding its voice. Several countries withdrew their ambassadors over the weekend. Mercosur has been proactive: it suspended Venezuela from the trading bloc last year, and invoked its democratic clause over the weekend, which could culminate in Venezuela’s expulsion. The Organization of American States (OAS) has been proceeding more slowly, despite Secretary General Luis Almagro’s hectoring. Almagro’s hopes that Venezuela might be suspended under the Inter-American Democratic Charter continue to run up against simple math; although a few countries seemed to shift their stance last week, many Caribbean nations remain beholden to Maduro, meaning that Almagro may still be short of the votes he needs, even if a special session of the body meets today as originally planned (early reports suggests that the new Bolivian chair of the Permanent Council may suspend the session). The Trump administration so far appears to be following the policies adopted by its predecessor. The United States has imposed targeted sanctions against individual Venezuelans, including Vice President El-Aissami, but has wisely avoided the temptation to more directly and unilaterally confront the regime, allowing Latin America to lead. But patience is wearing thin in Washington. A flurry of congressional declarations last week could presage more muscular legislative action in the months ahead; Senator Marco Rubio suggested that he would lean on recalcitrant OAS members, including by withholding assistance to countries that failed to support OAS action. Policymakers hoping to encourage a peaceful resolution of the crisis must pinch their noses and maintain a channel for dialogue with the regime while giving regime hardliners guarantees of non-reprisal if— but only if— they facilitate a rapid transition. Dialogue has been unproductive in the past, but keeping talks open at least offers the possibility of a strategic exit for regime members. UNASUR has been playing a key role in encouraging dialogue; it may yet be an effective good cop to the OAS’s bad cop, provided it does not allow itself to be used as a convenient pretext for the Maduro regime to string out talks endlessly. Guarantees for regime members who cooperate in finding a way out of the crisis are needed to ensure that negotiations are not seen as a zero-sum game. But the regime has played games for far too long to be trusted to negotiate in good faith. Simultaneously, therefore, regional governments must tighten pressure on the regime. The symbolic weight of an OAS suspension would be great— as Almagro said, “peer condemnation is the strongest tool we have.” But in addition to declaring the Venezuelan regime a pariah, regional and global allies could also help to keep hardliners over a barrel. Prosecutions, asset seizures, visa restrictions, and other sanctions would be most effective if they were employed not only by the United States, but also by Latin American and European allies.

Blog Post by Matthew M. Taylor April 3, 2017 Latin America’s Moment
Monetary Policy

Why Does the Fed Keep Lowering Its Unemployment Threshold?

Blog Post by Benn Steil and Emma Smith February 7, 2017 Geo-Graphics

Global

The World Next Week: December 4, 2014

U.S. Congress reaches a budget deadline; assessing Putin's state of the union speech; and Algeria hosts the 2014 Oil and Gas summit.

Podcast with James M. Lindsay and Robert McMahon December 4, 2014 The World Next Week
Fossil Fuels

Oil and OPEC: This Time is Not as Different as You Think It Is

The plunge in oil prices late last week, following an OPEC announcement that its members won’t cut their oil production now, has analysts scrambling to outdo each other with hyperbole. It is a “new era” for oil as OPEC has “thrown in the towel”. We are now in a “new world of oil” as the “sun sets on OPEC dominance”. The oil price decline since June is no doubt big and consequential. And U.S. shale is indeed a major new force on the energy scene. But there is nothing particularly unusual about how OPEC acted last week. It would be wrong to conclude that last week’s news decisively signals an end to the last decade or so of OPEC behavior. One need go no further back than the last big oil price plunge to see a similarly modest initial response from OPEC countries to a plunge in oil prices. After oil prices peaked at $145 per barrel in July 2008, they fell rapidly. On September 10, with the oil price at $96, OPEC declared a production cut, only for Saudi Arabia to announce within hours that it would ignore the agreement, rendering it meaningless. Indeed according to International Energy Agency (IEA) data, Kuwait, Angola, Iran, and Libya all expanded production in October of that year, while Saudi Arabia pared back output by mere fifty thousand barrels a day. Prices continued to fall. It took until an emergency meeting on October 25, with prices at $60, for OPEC to announce a real cut – and even that was not commensurate with the shortfall in global demand, leading prices to drop further. It was only in late December, as oil fell through the $40 mark, that OPEC countries finally cut production enough to put a floor on oil prices. Did OPEC countries usher in a new era of complete inaction when, with oil trading at $75 in early October 2008, they failed to cut production and stop the fall? Or when, at $50, they let prices continue to decline? Of course not: later events showed otherwise. It’s similarly premature to declare that sort of new era now: OPEC countries would be sticking to past behavior if they failed to cut production now but stepped in in a few weeks or months if prices fell considerably further. Part of the problem here is that media and analyst commentary has juxtaposed the refusal of OPEC countries to slash production now with an imagined world in which OPEC regularly tweaks output to stabilize the market while avoiding large price swings entirely. Seen through that lens, last week’s inaction looks like a radical departure. But, as Bob McNally and I argued in 2011 (and revisited a few weeks ago), OPEC has been out of the fine-tuning game since at least the mid-2000s, and even Saudi Arabia has been a lot less active at it than before. Our view wasn’t particularly unusual. (See, for example, “The OPEC Oil Cartel Is Irrelevant”, July 2008.) What happened last week is a useful reminder that OPEC no longer stabilizes markets the way it may once have. But it is not yet a revelation of a new era. One other note: A lot of the commentary around last week’s events has equated an absence of OPEC coherence with a shift in the center of gravity in world oil markets to the United States. But it’s been a long time since OPEC coherence was the root of OPEC influence. To the extent that “OPEC” is influential, it’s fundamentally because its biggest member, Saudi Arabia, is. Saudi Arabia doesn’t need to be part of a well-functioning cartel in order to influence world oil markets. (It did when a large number of OPEC members held spare production capacity; they no longer do.) Perhaps last week’s events and their interpretation may turn out to be a case of two wrongs making a right: people previously overestimated OPEC’s influence; now they’ve overestimated the degree to which there’s been a sea change in OPEC behavior. The net result may be a more reasonable view of how OPEC and the oil world work. For those who prefer to anchor analysis consistently to what we actually know, though, the only way to know how much the oil world has changed will be to wait. P.S.: I had an op-ed in the Financial Times over the holidays explaining how policymakers can take advantage of the ongoing drop in oil prices. The piece argues that policymakers should pursue reforms that made sense even absent the price decline, but that have been rendered more politically feasible by the price drop. Read it here.

Blog Post by Michael Levi December 1, 2014 Energy, Security, and Climate
Fossil Fuels

Does OPEC Matter? Jeff Colgan Responds

Last week, I blogged about a forthcoming paper in IO that argues that OPEC doesn’t have a significant impact on oil prices. In this post, Jeff Colgan, the author, offers a thoughtful response. A few further notes of my own are at the bottom. Last week, Michael Levi posted a critique of my forthcoming article in International Organization called “The Emperor Has No Clothes”. My article claims that there is no good evidence to believe that OPEC is a cartel, using evidence from four quantitative tests. The paper then explains why OPEC members have good reason to perpetuate this “rational myth” – being seen as a powerful cartel brings them international prestige and political benefits (which we can see in the data on diplomatic representation). Levi offers a balanced review of my argument but ultimately criticizes it for going too far. He raises some important questions. First, my article offers evidence that OPEC members generally produce as much oil as a non-OPEC state once we statistically control for things like size of reserves and a country’s investment and business climate, but Levi wonders whether the country’s investment and business climate isn’t itself shaped by a state’s OPEC membership. He suggests that an OPEC country, “having decided to underinvest in oil production”, makes little effort to improve its investment climate. His hypothesis about how OPEC influences investment is therefore premised on the idea that its members are intentionally underinvesting in their oil sector. He doesn’t offer any evidence to support that premise, and I’m skeptical. Leaders in OPEC states like Nigeria, Ecuador, Venezuela, Iraq, and elsewhere have repeatedly expressed their desire to increase oil production, not restrain it. They might be lying, of course, but the same countries have big incentives for higher oil production to balance their deteriorating fiscal situations. (The Gulf monarchies with huge reserves are different: they might actually be trying to under-invest, but the model accounts for that.) Still, intentions are hard to discern: do you think most OPEC states are trying to under-invest? Second, the statistical evidence shows that we cannot reject the null hypothesis that OPEC is having no effect, which is not the same as proving that OPEC is having no effect. We should be cautious. Levi criticizes the article for dealing with this issue only “indirectly.” That’s a bit unfair: I consider it quite explicitly, by exploring what happens if we ignore the statistical insignificance of the OPEC coefficient in the regression model and instead treat it as a real effect. Doing so suggests that OPEC produces 1.6 million barrels per day (mbpd) less than it would if it was acting competitively. Levi says this is “not a trivial amount of oil” and argues that it might, in fact, indicate OPEC’s cartel behavior. A lot of policymakers would agree, but I think that’s a mistake. 1.6 mbpd is less than 2 percent of the world oil market. In the long-run, that amount is small: it would mean a price increase of a few percentage points at most. Still, Levi then raises an even more interesting question: what if the coefficient is not only statistically significant but also underestimates the true effect of OPEC (within the span of the error bars)? That is unlikely but possible, and Levi is wise to raise it as a cautionary point. Third, Levi concludes that it would be “awfully unwise for policymakers or market participants to quickly flip to an equally over-confident belief that OPEC doesn’t matter.” He is right to urge prudence, but not if the alternative is for policymakers to continue wasting valuable time, resources, and political capital in the belief that OPEC controls world oil markets when there is no good evidence to support that belief. Economists have been casting doubt on the OPEC-cartel idea for thirty years. My work adds more fuel to that fire, and shows why OPEC members have reason to perpetuate the myth – it gives them prestige and political benefits. When US policymakers want the price of oil to change, they waste political capital by kowtowing to OPEC (not just Saudi Arabia). Until someone produces some real evidence of cartel collusion, US leaders should stop doing that. More broadly, journalists and pundits should stop using the assumption that OPEC’s actions are key drivers of world energy markets. They are not. Most of the credit or blame for rising oil prices in the last decade rests with the energy demands of new Asian customers, not diabolic moves by OPEC. Legislation such as the various “NOPEC” bills in the US Congress may be useful for scoring political points, but they have little bearing on the reality of the global oil markets. With the world price of oil set by market forces almost entirely outside of its control, OPEC seems to be along for the ride like everyone else. Some further notes from Michael Levi: Colgan makes several important points. In particular, he and I agree that unquestioning claims about massive OPEC influence are unwise. But let me emphasize a few matters of continued disagreement. First, the fact that several "peripheral" members of OPEC appear to produce as much as they can doesn’t provide evidence against the widely held belief that the OPEC "core" restrains investment. Second, regarding whether 1.6 mb/d is a trivial amount of oil underproduction: Colgan is right to say that this isn’t a big amount in the long run. But remember that this figure is obtained by averaging over a period of several decades; to really establish that OPEC under- (or over-) production isn’t important one would need to look at the pattern on shorter timescales (including with a focus only on the shorter period where observers have actually claimed that under-investment was a major OPEC tool). Third, I emphasized in my post that Colgan’s statistics do in fact suggest (though far from prove) OPEC has influence on oil production even after controlling for investment environments, just not at the 90-percent confidence level that political scientists typically require; Colgan appears to accept parts of this. It’s hard to go from that to unequivocal claims that OPEC isn’t a "key" player and that "most of the credit" for rising oil prices lies beyond the group.

Blog Post by Michael Levi May 30, 2013 Energy, Security, and Climate
Fossil Fuels

Does OPEC Still Matter?

Bob McNally, one of the smartest obsevers of the nexus of energy and politics around, published a provocative note last Thursday on the recent evolution of OPEC and what it means for global oil markets. In light of what’s been going on in the Middle East, I thought it would be worth excerpting at some length. Here’s how he starts: We believe the 36-year era of OPEC oil price control ended in 2008, giving way to a new, indefinite "Swing Era" in which large price swings rather than cartel production changes will balance global oil supply and demand. The Swing Era portends much higher oil price volatility, investment uncertainty in conventional and alternative energy and transportation technologies, and lower consensus estimates of global GDP growth. Ironically, Western governments and investors will miss OPEC, or at least the relative price stability it tried to provide After talking a bit about history since the early 1970s, he turns to the last price shock: From 2005-2008, it was OPEC’s turn to fail to rise to the task when needed. It was the first instance during peacetime when OPEC spare capacity was depleted…. In 2008, market balance was only achieved through a brutal price spike that rationed demand and crushed income. What does that mean for the future? Looking to the foreseeable future, a replay of super-tight 2005-2008 fundamentals is not a question of if, but when…. Saudi Arabia holds the bulk of spare capacity, but has frequently stated it wishes to keep only 1.5-2.0 mb/d. Even if total oil production is far from a peak, ex-ante demand growth is likely to outstrip net supply growth, draining spare capacity and requiring demand-rationing, if not GDP limiting, price increases to ensure consumption and supply growth are balanced. Bob doesn’t think that OPEC is completely done, but he does think that its influence will be significantly lessened: In the future, OPEC can maintain a price floor by cutting supply. But insufficient spare capacity will deprive it of the power to impose a ceiling. When demand growth again whittles spare capacity below 2 mb/d, prices will soar…. I’m pretty sympathetic to this argument. I also think that it has big consequences for how we need to think about oil. But I’d still throw in a few notes of caution. First, if global economic growth falls substantially below expectations, Saudi Arabia might find itself with considerably more spare capacity than planned. That scenario could leave it with real stabilizing power for much longer. Second, the current unrest in the Middle East might make Riyadh rethink its attitude toward holding spare capacity: if high fuel costs drive unrest, and that unrest has the potential to spread to Saudi Arabia, it could get policymakers’ attention. Third, while more volatile oil prices would be a net negative for the U.S. economy, part of the impact might be lessened by the deepening and broadening of hedging products. Right now, it’s tough to hedge oil exposure out more than a year or two, in part because would-be market makers are uneasy with the political risk that stems from OPEC’s role in the market. If the oil market starts to look more like, well, a market, consumers might be able to hedge more effectively, which would help blunt the impact of increased volatility a bit.

Blog Post by Michael Levi March 7, 2011 Energy, Security, and Climate