The woes of prohibition-era mobsters may be a long way from those of OPEC ministers meeting in Vienna, but they aren’t entirely different either. The quote is all about diminished power, something OPEC knows all about.
For years, the oil cartel held a firm grip on oil prices. In 1973, OPEC imposed an embargo. The price of oil shot up from $1.70 a barrel to $12.50. OPEC controlled much of the world’s oil supply. And it wielded that influence like a truncheon.
But slowly that grip loosened. The cartel has been beset by in-fighting. Members constantly cheated on their own production quotas. High prices encouraged other countries to produce oil of their own. Today, the United States is set to become the world’s largest producer of oil.
Keeping a lid on global prices is a difficult job that requires patience and discipline.
Today in Vienna, the once-mighty OPEC ministers gather under dramatically reduced circumstances.
"It’s not meaningful as an economic cartel, and what we’ll see this week is going to be good theatre, but not much more than that," says Jeff Colgan from Brown University.
Colgan says the rise in oil production from non-OPEC countries combined with lower growth in China are the main factors driving down oil prices — a basic matter of supply and demand. More oil sloshing around the world today and a weaker global economy mean there’s less demand from people looking to power their factories and ship their goods.
OPEC may decide nothing
In the midst of plummeting oil prices, OPEC countries are pushing for wildly different solutions. Saudi Arabia wants lower prices to force out the competition, especially in the U.S. and perhaps even Canada. Iran and Venezuela want higher prices to pay the bills.
“I don’t think OPEC is going to be able to come to any meaningful agreement whatsoever,” says Colgan.
Some analysts have said that unless OPEC countries agree to cut production, the price of oil could fall as low as $60 per barrel. Now, that would be welcome news to most of us. Driving your car, heating your home and shipping your goods will all become cheaper. But what does it mean for Canadian oil production?
A recent report from TD Bank says the effect of falling oil prices is often misunderstood. It points to a gap between what it costs to start an oilsands project and what it costs to keep existing ones running.
“Industry 'break-evens' are often quoted in the media, but are frequently misinterpreted as production break-evens, when in fact they are the price required for investment in new capacity to generate an acceptable rate of return," the bank's economist Leslie Preston says. "Operating costs for current output are much lower, and producers are unlikely to turn off the taps due to short-term price fluctuations."
Oil patch holding its breath
Suncor CEO Steve Williams says Canada’s oil production has played a role in mitigating the influence of OPEC.
"I think the position of OPEC has changed a little, just because the U.S. and Canada have been so successful in managing both the supply and the demand side,” he said at a conference in Calgary this week. "It's very difficult to predict the price of crude. What I would say is supply and demand is working. It's been working through this period where demand has been soft and supply has been good."
But the question remains: if OPEC has lost its influence, why is the price fluctuating so wildly in the lead-up to its Vienna meeting?
“Uncertainty breeds volatility,” says commodities trader Colin Cieszynski with CMC Markets in Toronto. He says the meeting is a glimpse into just how diminished the OPEC countries' influence has become.
“Either they cut [production] or they do a compromise where they pretend to stop cheating each other. Or the thing ends up with no agreement at all. It’s hard to say, but at least it’s a firm date and deadline where people have something to say, 'OK, well after this, then we can figure out what’s going on from there.'"
Whatever they decide, it’s clear the landscape has changed. The days of OPEC ministers dictating prices of oil are over. That said, the price of oil is still set by a dizzying array of influences. It’s still complicated. If anything, the diminished influence of OPEC may make it more difficult to predict than ever.Suggest a correction