The shift in oil market power away from OPEC towards a bilateral relationship between Saudi Arabia and Russia is the culmination of structural changes in oil production over the last 20 years.
These shifts are deeply structural and have little to do with the personality or negotiating skills of individual oil ministers, which arguably attract far too much attention from commentators and journalists.
Most of these changes can be traced back for 20 years or more, though some of them have recently accelerated, such as the recent slump in output from Venezuela and Libya.
To the extent that production is an important component of market power, the very different fortunes of OPEC countries have significantly redistributed power within the organisation.
The result is that the focus of decision-making has shifted from intra-OPEC negotiations to extra-OPEC negotiations with Russia.
OPEC was founded in 1960 to reduce harmful competition over taxes, royalties and oil ownership between its original members as they tried to attract investment from the international oil companies.
“The principal aim of the Organization of the Petroleum Exporting Countries shall be the coordination and unification of the petroleum policies of Member Countries”, according to OPEC’s founding statute.
The five founding members (Saudi Arabia, Iran, Iraq, Kuwait and Venezuela) accounted for a significant share of the world’s undeveloped oil reserves and were among the fastest-growing producers.
OPEC’s initial focus was on creating a united front in negotiations with the international oil companies to secure a greater share of revenues from the sale of oil.The addition of Libya (1962), United Arab Emirates (1967), Algeria (1969) and Nigeria (1971) added other major reserve holders and rapidly growing producers to cement OPEC’s negotiating power.
OPEC’s practical focus has shifted over time from taxes and royalty rates (1960s) to equity ownership of reserves (1970s), prices (1970s onwards) and production allocations (1980s onwards).
The organisation’s market power arguably peaked in 1973, when members accounted for just over half of all oil production worldwide, before sliding to around a quarter in 1985, and partially recovering in the years since then.
In the early years, OPEC was dominated by an internal balance of power between Saudi Arabia, Iran and Venezuela, with other countries playing a more peripheral though occasionally disruptive role.
In 1970, these three countries were producing roughly the same amount, about 3.8 million barrels per day each.
By 1973, Saudi Arabia had already pulled significantly ahead (7.7 million bpd) of both Iran (5.9 million bpd) and Venezuela (3.5 million bpd), a gap that has widened in the subsequent decades.
OPEC members can be broadly divided into winners and losers since 1973, based on whether they increased output by 2017.
The biggest winners have been Saudi Arabia (+4.3 million bpd), Iraq (+2.5 million bpd), United Arab Emirates (+2.4 million bpd), Angola (+1.5 million bpd) and Qatar (+1.3 million bpd).
The biggest losers have been Libya (-1.3 million bpd), Venezuela (-1.3 million bpd) and Iran (-0.9 million bpd) with other members occupying an intermediate position.
The winners have mostly benefited from a stable government, significant investment, some of it foreign, and technical expertise. The losers have been hit by conflict, sanctions, unrest, corruption and mismanagement.
Some countries have bounced back from earlier setbacks, notably Iraq, which experienced severe production losses during the 1980s, 1990s and early 2000s as a result of war and sanctions.
Some have suffered more recent problems, such as Libya’s descent into tribal conflict, from which they may recover in time.
Others have experienced a patchy production history throughout the last few decades, such as Venezuela and Nigeria – which has recently taken a sharp turn for the worse in the case of Venezuela.
As a result, Saudi Arabia and to some extent the United Arab Emirates have become much more powerful while Iran and Venezuela have been relegated to a more peripheral status.
Moreover, Saudi Arabia, Kuwait and the United Arab Emirates are the only members with significant production flexibility and contributed most of the voluntary output cuts under the December 2016 production agreement.
Other members of the organisation generally produce as much as they are technically able because their immediate revenue needs are enormous.
To the extent countries such as Nigeria, Libya and Venezuela have cut production, the loss of output has been forced upon them by unrest and mismanagement.
Between the 1970s and the 1990s, most intense negotiations occurred within OPEC, as members tried to reach a common position among themselves, and only then negotiate with producers outside the organisation.
But the shifting balance of production and power has made intra-OPEC negotiations much less important and put much more emphasis on extra-OPEC negotiations, especially with a resurgent Russia.
Sanctions and unrest have sidelined Iran, Libya, Venezuela and to some extent Nigeria, largely relegating them to bystanders within OPEC negotiations.
Of the remaining OPEC members, Kuwait and the United Arab Emirates have coordinated their production policies closely with Saudi Arabia for the last two decades.
The changing balance of power has left Saudi Arabia as the undisputed leader of OPEC and free to concentrate on negotiations with outside countries, principally Russia.
Instead of negotiating production allocations around a conference table at OPEC headquarters in Vienna, which was the focus for decision-making between the 1980s and 2000s, the most important negotiations are now bilateral between Saudi Arabia and Russia.
The shift should not come as a surprise to long-term observers of OPEC. The balance of power and the content of negotiations has changed repeatedly in the last six decades.
It may not be the last shift. If Iraq’s production continues to climb it will become harder to ignore and the balance of power will shift again.
Output in Iran, Venezuela and Libya could eventually recover, or Nigeria could return to growth, also challenging Saudi Arabia’s control.
For the time being, however, Saudi Arabia’s leadership is undisputed and the negotiations that matter are with Russia.
This article was syndicated by Reuters, 9 August 2018
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.