The King Is Dead. Long Live The King.

New technology has displaced oil’s major role in the global economy.

 
 

The price of oil sank to a 12-year low on Wednesday. At $26.55 per barrel, this is the lowest oil has cost since May 2003, reports the Washington Post.

The drop in oil prices has caused a sell-off in global stocks, which makes today as good a day as any to take a look at the history of OPEC and its influence on the world market.

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The Organization of the Petroleum Exporting Countries (OPEC) was organized in 1960 by the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. But the intergovernmental organizationbut did not come to bear as a force until the oil embargo in 1973.

For several years after that, the cartel often used oil as a political weapon. OPEC threatened to cut the supply of oil, and the world shuddered. In the 1990s, OPEC's sway lessened as its members frequently cheated on quotas, but OPEC remained solidly intact.

In the 2000s, member cheating became the norm. Moreover, leverage oil speculators took over the pricing of oil regardless of supply and demand.

But the biggest threat ever to OPEC surfaced this decade. A new technology allowed the United States, OPEC’s best customer, to start producing a much larger portion of what it consumes. When the U.S. fracking industry took off — the U.S. wasn’t alone in employing this new technology, but it was the biggest — and increased production capabilities, OPEC started losing market share at a rapid pace, which posed a long-term problem.

The only weapon OPEC had was to drive the price of oil lower. So, it started allowing its member countries to produce what they wanted, although it did go through the motions of holding meetings to set caps. As the price of oil continued to fall, OPEC members that needed maximum revenue to fund the government ramped up production. The senior members of OPEC looked the other way.

On Friday, Dec. 4, 2015, OPEC effectively folded its tent. The organization’s 168th meeting ended with no cap on production at all — not even for appearance. It will still hold meetings every six months, but it’s a club that no one really wants to be part of any longer.

Whether OPEC exists in the future is irrelevant, and its major members are accepting short-term pain in the hopes of long-term gain. The major producers are waging a price war on the United States and others, and they are winning the early battles.

Existing oil fields in the United States are still producing, but new exploration and production efforts have collapsed.

But OPEC is fighting a losing battle long-term because the new king of oil is technology. Technology has disrupted multiple industries over the years. Oil is next.

Technology will continue to devise ever-lower costs of production, and any increase in the price of oil will yield more activity. OPEC will lose.

I have no idea of where the price of oil will go over the short-term. There will be multiple rallies and declines — as happens in all commodities — but the die is cast. Oil will no longer be a major factor in the global economy.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

 
 

Jan. 21, 2016


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  • Interesting thesis. thanks for this observation. c
    Anonymous