The Death of OPEC – How Shale, Russia, and Canada Killed It
Many economists and finance professionals have come to the conclusion that OPEC’s reign over the world’s oil markets is over. OPEC gained influence during the oil crisis of the 1970s, but current factors have made manipulating prices a difficult process. In the global market, emerging economies like China have reduced demand for crude oil. To make matters worse for the Arab oil cartel, shale and other alternative energy sources have become popular in developed nations.
Alternative energy sources and competitors have caused the dramatic fall of the infamous oil cartel. Some countries have also tapped into their own oil resources to reduce their dependency on OPEC and other exporters. Russia, Canada, and the United States have also weakened OPEC’s influence by increasing oil exports. Due to the fall of OPEC, future oil prices will likely follow the market instead of cartel output restrictions.
Shale and Alternative Energy Sources Cripple OPEC
Shale has been a potential energy source for many years, but the extraction techniques used for shale ensured that it was too expensive to be used as a primary energy source. Recent technological advancements have changed this; shale can now be extracted, transported, and sold at a fraction of previous costs. Since shale is now a cost-effective energy option, it is a viable substitute for oil. This means that oil cartels and single-price monopolies will be unable to successfully fix prices to earn abnormally high returns.
According to Fortune, OPEC attempted to kill the shale industry in 2015 by bidding down the price of shale. Leaders from OPEC understood that a cost-effective shale option would eliminate the possibility of price-fixing, so they lowered oil prices to prevent investment in shale companies. OPEC’s effort to destroy the shale industry failed, and American and Canadian shale companies gained traction.
Due to a growing shale industry, domestic production of energy in the United States increased rapidly in 2015. With fewer American purchases of foreign oil, OPEC’s supply glut grew. This ensured that the market price of oil continued to plunge, and OPEC suffered losses. This situation has not improved for OPEC in 2016. As other alternative energy sources become cost-effective options, crude oil may be replaced, and the entire oil industry will cease to exist.
Russia’s Increased Oil Production Harms OPEC
After Russia invaded Ukraine’s Crimea in 2014, American-Russian relations were tense. To express their discontent with the situation, America waged an economic war on Russia. To compensate for the lack of trade between Russia and America, Russia boosted its oil output. Russia has traditionally only produced petroleum for its domestic market, but it is now selling crude oil and byproducts. This is an effort by Russia to compete with the United States’ diversified oil industry. In addition to eliminating American imports, Russia no longer needs oil resources from OPEC.
With both Russia and the United States relying on their domestic energy resources, OPEC’s cartel powers are irrelevant. Since OPEC is quickly losing funds, power, and influence in the world market, it will not be able to recover when foreign demand for oil finally increases. Russia, Canada, and the United States may even emerge as the primary exporters in the global energy market. According to Bloomberg, to compete with this trio of economic powerhouses, OPEC would need to reduce market prices by increasing output over a long period. Due to current security and political situations in the Middle East, increasing output to reduce prices is not an option.
The fall of OPEC will lead to reduced budgets for Arab states that are currently battling the Islamic State. Despite their tight budgets, these nations will increase their military budgets to compensate for the threat of the Islamic State. This will result in deteriorating economies that are unable to compete with America and Canada.
Canada Enters the Fray to Threaten OPEC
As a result of economic efforts to be more competitive in the global economy, Canada has increased its output of oil and shale. Recent estimates suggest that Canada’s tar sands deposits have more oil than the entire Middle East, so Canada is capable of replacing OPEC in the global market. In addition to being independent, Canada’s vast resources will allow Canada to sell oil to developed countries and areas of the world that demand energy resources in the future. Since Canada, the United States, and Russia do not operate as cartels, oil can fluctuate around the free market price. Unfortunately, the market price may still be artificially adjusted by embargoes, quotas, and tariffs.
Since cartels manipulate output to increase prices, the fall of OPEC is great news for consumers. The elastic oil demand curve means that price mechanisms will deliver information properly in the future. This will prevent shortages and supply gluts, and prices will remain stable. For more information about the death of OPEC, go to PersonalMoneyStore.com.