Is OPEC dead or alive? Oil markets watched closely this week as the Organization of the Petroleum Exporting Countries worked with Russia to try to cut back production, which suggests the group still has some vitality.
But earlier in the week, longtime member Qatar decided to quit OPEC. It’s the surprise move by Qatar that is a better indicator of the group’s situation.
Here’s what these developments mean for OPEC — and the rest of the world.
What just happened?
On Monday, Qatar’s energy minister, Saad Sherida al-Kaabi, announced the country would leave OPEC in January to focus its efforts on natural gas. Qatar joined in 1961, just a year after the organization was founded.
Natural gas is far more important than oil to Qatar’s economy. Kaabi’s official statement was that Qatar seeks to boost its gas production “from 77 million tonnes per year to 110 million tonnes.”
Qatar’s energy minister denied that politics were a consideration, but many OPEC observers speculated that Qatar is looking to get out from an organization dominated by its hostile neighbor, Saudi Arabia. The Saudis and the United Arab Emirates slapped an embargo on Qatar in 2017, stemming from a long-standing border dispute and other political frictions.
What does Qatar’s exit mean economically?
Qatar’s departure means little for OPEC’s market share. Qatar produces about 600,000 barrels of oil per day, less than 2 percent of OPEC’s total production. Other OPEC members’ production dwarfs that amount. Saudi Arabia alone pumps roughly 10 million barrels per day.
OPEC is not much of a cartel, even though it often gets that label in the media. My research shows that since 1982, OPEC has cheated on its own production targets a staggering 96 percent of the time.
Moreover, OPEC sets its production targets in ways that undermine its own influence. A true cartel needs to set strict quotas that limit the production of each of its members and stick to them. OPEC sets easy quotas and then fails to meet even those.
Even so, any OPEC moves to cut or boost production tend to be seen as evidence of cartel activity. This is misleading. Just because OPEC often cuts production when oil prices are falling, which can raise prices, does not mean that it is a cartel. Even in perfectly competitive markets, supply tends to shrink when prices are low, and grow when prices are high. OPEC behaves similarly, almost all of the time.
What does it mean for world energy markets?
While ineffective at controlling production, OPEC still matters to markets because of the signals it sends about how Saudi Arabia sees the market and what it plans to do. So OPEC as a group of countries has market power (mainly because of Saudi Arabia), even if OPEC as an institution adds little.
OPEC’s weakness as an institution means Qatar’s departure did little to upset energy markets. The price of oil barely moved in response to the announcement. The price of oil responded far more strongly to ongoing tumult in the U.S.-China trade relationship.
Some observers speculate that Qatar’s move could shape natural gas prices in the long term, especially in Asia — where gas contracts are still linked to the price of oil. There is no sign that this is happening yet, however.
What is the political impact?
OPEC’s real significance is as a political club. Having gained a reputation for global significance in the 1970s, OPEC perpetuates the myth that it regularly manages the world oil market. That reputation means its members receive more diplomatic attention than they otherwise would.
Consequently, the OPEC secretariat reacted to Qatar’s departure by attempting to shore up the organization’s political clout. It emphasized that Gabon rejoined the organization in 2016 and two new members joined recently, Equatorial Guinea (2017) and the Republic of the Congo (2018).
Yet Qatar is the first country in the Middle East to leave OPEC. Already, Iran’s oil minister, Bijan Zanganeh, has said OPEC has problems and urged the organization to examine the reasons for Qatar’s exit. Indonesia also left the organization in 2009 (though it briefly rejoined in 2016).
Qatar’s departure indicates the low political value it sees in the group. Sheikh Hamad bin Jassim Al Thani, Qatar’s former prime minister, said the “organization has become useless and adds nothing to us.” Going further, he said the organization was being used “only for purposes that are detrimental to our national interest,” perhaps alluding to OPEC’s political downside: It attracts blame for high oil prices.
President Trump has chastised OPEC throughout the fall for high oil prices. Staying on Trump’s good side is important for Qatar. After all, U.S. officials reportedly stopped Saudi Arabia from invading Qatar in 2017.
OPEC used to rise above Middle East tensions
Qatar’s departure is also remarkable in the context of the ongoing tensions in the region. OPEC has traditionally weathered such tensions and even served as neutral ground for feuding parties.
For instance, two of OPEC’s members — Iraq and Iran — fought a bloody eight-year war in the 1980s. Both remained in OPEC throughout.
So while Qatar might not have left OPEC because of its frictions with Saudi Arabia, the move indicates how little value Qatar sees in the institution as a political forum. For those who recall its heyday in the 1970s, OPEC is a shadow of its former self.
Jeff Colgan is the Richard Holbrooke Associate Professor of Political Science at Brown University. He is author of “Petro-Aggression: When Oil Causes War.” Follow him @JeffDColgan.