The OPEC Conundrum

When OPEC met on 27th November they decided to leave production unchanged and to not meet again until June 2015. This at a time of volatility in oil markets and plunging price that leaves many OPEC member states facing budget deficits, some large and unmanageable.

In this post I take a look at the oil production and consumption history of OPEC and find that historically OPEC has been as much controlled by markets as to be in control of them.

Figure 1 Oil production data for OPEC member states. Indonesia and Gabon have both left OPEC. The situation in 1998 was very similar to that in 1973 (see text for details). The $1000 question is whether 2014 is reminiscent of 1979?


There is no satisfactory, easily accessible complete data set for OPEC oil production and consumption. The EIA archives begin in 1980, a bit too late to be helpful. The IEA data I have were transcribed from the monthly Oil Market Reports by Rembrandt Koppelaar and begin in 2002. The BP data begins in 1965 providing the longest time series and reports production for all OPEC countries. But does not report oil consumption for 5 countries – Iraq, Libya, Nigeria, Angola and Gabon.

BP report annual crude+condensate+natural gas liquids (C+C+NGL) and I elected to use this data since it is easy to use, even although it is incomplete. Oil exports are deduced from the difference between reported production and consumption which is an imperfect approach.


OPEC (the organisation of the petroleum exporting countries) was founded in 1960 by Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. They were soon joined by several other countries and the membership today is twelve strong. Countries have come and gone, most notably Indonesia in 2009 since it became an importing country in 2003. Gabon left in 1995.

OPEC first flexed its muscles in 1974 in response to “western” assistance given to Israel during the Yom Kippur War of 1973. This sent the oil price sky rocketing from $17 (1973) to $55 (1974) (all prices adjusted to $2013). Surprisingly, OPEC at this time, did not cut production and the punishment was delivered by an oil embargo. But up until 1973, OPEC had been expanding production year on year to meet growing global demand. In 1974, production was not increased and was held constant for the following six years supporting the artificially raised price (Figure 1).

The second oil shock of 1979 actually had nothing to do with OPEC but was caused by the Iranian Revolution that sent the price up from $50 in 1978 to $101 in 1979. Careful examination of Figure 1 shows a slump in Iranian production from 1978 through 1979 and 1980. This was initially partially offset by increased output from OPEC who at this time wanted to protect their markets from over priced oil. The price remained over $100 in 1980 but it then turned downwards, partly in response to the recession caused by the high price and to new supplies that were coming on stream all over the world, most notably in the North Sea and Alaska. Sound familiar?

1980 marked the end of oil shock era and the beginning of an 18 year bear market for the oil price that would collapse to $31 by 1986 and carry on down more slowly to $18 by 1998, actually spending some time below $10 that year. From 1979, with prices collapsing, OPEC cut production dramatically for 6 successive years without managing to halt the slide. But then in 1986 OPEC increased production, precipitating the final price rout. From then on, OPEC began to exert control over the oil market rebuilding market share despite prices that continued to slide. Sound familiar? By 1998, OPEC production had returned to 1979 levels and the price had almost returned to pre-1974 levels. Market equilibrium had been restored.

The nadir of 1998 was a bleak time for the oil industry. I was running a small service company at the time and remember it well. This was pre-information age era. Few of the people I knew in the industry then understood what had just happened and even fewer imagined what was to follow. Enter the era of mega-mergers.

1998 marked the beginning of the great oil bull run that would see daily price peak at $148 in 2008 and the annual price peak at $115 in 2011. This bull run was not caused by OPEC manipulation of events or war but by a simple supply and demand dynamic where rising price has maintained market equilibrium.

Standing back to look at Figure 1 we see some remarkable similarities between the situations in 1973 and 1998. OPEC had just increased production significantly to over 30 Mbpd in each case. The oil price was chronically weak in each case. And in each case in the following years OPEC maintained constant production and the price soared. The situation today is not identical to 1979 but it does rhyme. This time OPEC market share and oil price are not at risk from new giant fields like Prudhoe Bay, Brent and Forties but from US shale oil.

Consumption and Exports

While many oil watchers will be familiar with the roller coaster OPEC production data, less are familiar with the monotonic rise of OPEC oil consumption (Figure 2), especially in the big population countries: Saudi Arabia, Iran, Venezuela and Indonesia – the latter leaving OPEC when consumption overtook production in 2003. For the eight OPEC countries with data, consumption was 1 Mbpd in 1965 and has grown to 8 Mbpd in 2013.

Figure 2 A common feature of oil producing nations is a thirst for oil. OPEC is no different and has witnessed soaring consumption as prosperity and populations have soared. No data for Iraq, Libya, Nigeria, Angola and Gabon.

Figure 3 Because of rampant home demand (Figure 2) oil exports from selected OPEC countries are in decline, a trend that is expected to continue. No data for Iraq, Libya, Nigeria, Angola and Gabon.

Despite raising production to meet rampant demand since 2005, rampant home consumption has meant OPEC exports (selected countries) going into slow decline (Figure 3).

The End of OPEC?

OPEC has had a huge influence on global oil markets and thereby the world economy, but as shown here has been buffeted around by market events as much as it has managed to control them. We have entered a new period of uncertainty.

The organisation can be divided into three groups of countries: 1) the dysfunctional –  Iraq, Iran and Libya where future production is just as likely to be controlled by politics than by design: 2) the declining countries – Algeria, Nigeria, Angola and Venezuela where resource exhaustion has sent production of conventional crude into reverse (Figure 4) and 3) the super wealthy gulf states – Saudi Arabia, Kuwait, UAE and Qatar where production is still rising to cover for falls else where (Figure 1). How long this can go on for is anyone’s guess. The power of OPEC will increasingly be placed in the hands of these countries who have the capacity to increase production and the wealth to withhold it as they see fit. The other countries are along for the ride.

Figure 4 Just because a country exports oil does not make it immune to the resource depletion that causes production to peak and then decline as observed in many countries around the world. These four countries have all experienced production decline in recent years. This is not necessarily terminal for these countries, but low oil prices will likely accelerate this process.

The press release from the 166th meeting is worth reading and this paragraph caught my eye:

Recording its concern over the rapid decline in oil prices in recent months, the Conference concurred that stable oil prices – at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand – were vital for world economic wellbeing.  Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30.0 mb/d, as was agreed in December 2011.  As always, in taking this decision, Member Countries confirmed their readiness to respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.

This pretty well sums up the OPEC conundrum. But note the closing sentence. They have elected to take no action but reserve the right to act nonetheless. Expect to see the super wealthy group of gulf producers cut production well before June 2015.

This entry was posted in Energy and tagged . Bookmark the permalink.

17 Responses to The OPEC Conundrum

  1. Javier says:

    Seems pretty clear that they learnt a lesson during the big oil glut and will reduce production only if/when market share is not in danger.

    More interesting is their different pricing to different regions of the world, that speaks volumes about where they see their market share in danger.

  2. Sam Taylor says:


    Surely OPEC’s response will depend on how quickly the rest of the world cuts output. I’m sure OPEC wouldn’t be sorry to see the north sea’s decline accelerating. If they were to cut at the same time as global production was decreasing, they would risk destabilising the market even further. Given that the price response appears to be nonlinear at the moment, I think that the smartest move they could make is not to twiddle any knobs too quickly, for fear of what might happen.

    • Euan Mearns says:

      Maybe. I read somewhere that Saudi expects $60 – well we are almost there. I don’t know how long to kill non-OPEC capacity. There is obviously a serious imbalance at present and these things tend to overshoot.

  3. Olav says:

    I am following North Dacota production every month. September was good month which was really unexpected, so there may have been some noise there. Next monday is October production due and thath month or November is likely the last before decline. In November war issued drilling permits reduced with 40% and the remaing 60% comes of applications that was put forward before rhe recent oll price decline really took place. The Desember drilling permits will go down. This looks like the usual winter dip is comming without the later upswing.
    Low price now is the “seed” for hig price later due to decline in investment and increase in demand.
    Maybe late winter is a good time to buy oil stocks before the world recognizes that the shale “revolution” is ended with the price we see now. Shale oil may be reignited and hopefully reach new heights with higher prices later if the paticipants surive the comming ebb. If they dont then it will be harder for newcommers to get into this costly operation as the investors are badly burnt already.
    This is what I believe. Off cause I could be wrong. But I hope the North European producers will regain some strenght due to higher prices by next summer.

    • Euan Mearns says:

      Olav, I think the sketch you draw here is pretty good apart from the timing. Looking at the duration of past oil price events I think 2015 will be horrific for high cost OECD producers. BIG bounce in 2016.

  4. Lars Evensen says:

    One question: OPEC seems to be very split between the different fractions that Euan describes, but the Gulf states have the bigger hand and most influence. They always seem to win internal fights because the other members have no choice.
    But if OPEC were to split and let`s say only the four Gulf states would remain, would that really make any difference in influence? These states have virtually all the swing capacity if I have understood it correctly, and they seem to have the budgetary capacity to tolerate lower prices for a while unlike the others. To me OPEC membership looks more and more meaningless for the other 8 perhaps with the exception of Iraq. So is there really a good reason for them to remain anyway and would OPEC be more or less powerful if they leave, or unchanged?

  5. Yves says:

    Dear Euan,

    It is really a PITY that most peak oilers and yourself stay in the little song :
    “first oil shock (73) = Yom Kippur/Arab embargo= geopolitical story= nothing to do with geologic constraints”

    When the first oil schock was first and foremost the consequence of US 1970 peak.

    A summary :

    – end 1970 : US production peak, the energy crisis starts from there, with some heating fuel shortages for instance (some articles can be found on NYT archive on that), or :
    – Nixon name James Akins to go check what is going on.
    – Akins goes around all US producers, saying this won’t be communicated to the media, but needs to be known, national security question
    – The results are bad : no additional capacity at all, production will only go down, the results are also presented to the OECD
    – The reserves of Alaska, North Sea, Gulf of Mexico, are known at that time, but to be developed the barrel price needs to be higher
    – In parallel this is also the period of “rebalance” between oil majors and countries on each barrel revenues (Ghadaffi being the first to push 55/50 for instance), and creation of national oil companies.
    – there is also the dropping of B Woods in 71 and associated $ devaluation, also putting a “bullish” pressure on oil price.
    – So to be able to start Alaska, GOM, North Sea, and have some “outside OPEC” market share, the barrel price needs to go up (always good for oil majors anyway) and this is also US diplomacy strategy
    – For instance Akins, then US ambassador in Saudi Arabia, is the one talking about $4 or $5 a barrel in an OAPEC meeting in Algiers in 1972
    – Yom Kippur starts during an OPEC meeting in Vienna, which was about barrel revenus percentages, and barrel price rise.
    – The declaration of the embargo pushes the barrel up on the spots markets (that just have been set up)
    – But the embargo remains quite limited (not from Iran, not from Iraq, only towards a few countries)
    – It remains fictive from Saudi Arabia towards the US : tankers kept on going from KSA, through Bahrain to make it more discrete, towards the US Army in Vietnam in particular.
    – Akins is very clear about that in below documentary interviews (which unfortunately only exists in French and German to my knowledge, and interviews are voiced over) :
    For instance after 24:10, where he says that two senators were starting having rather “strong voices” about “doing something”, he asked the permission to tell them what was going on, got it, told them, they shat up and there was never any leak. The first oil shock “episode” starts at 18:00
    The “embargo story” was in fact very “practical”, both for the US to “cover up” US peak towards US public opinion or western one in general, but also for major Arab producers to show “the Arab street” that they were doing something for the Palestinians.

    In the end, clearly a wake up call that has been missed, especially at a time when we are around global peak and the omerta about it is almost complete.

    Note : About Akins, see for instance :

    And his famous foreign affair article :

    His report to Nixon in 71 or 72 is still classified to my knowledge though, would be interesting to know if it can be declassified now.

    • Nixon reports should be declassified in under a decade @ the 50 yr mark

      • yt75 says:

        Some are declassified before the limit I think, would be interesting to know if this one could.
        Because the image “the first oil shock=geopolitical story” is really one, if not the main misconception of the whole oil history (and XXth century image).

      • Yves says:

        Some are declassified before the legal limit I think, would be interesting to know if this one could.
        Because the equation “first oil shock= geopolitical story” is for sure one of the most enduring myth of oil history (and of the XXth century).
        In fact it is simply used as the name of the first oil shock : “arab embargo”.
        ps : sorry for potential doubles, something is behaving strangely on firefox/mac OS, on chrome here

    • Euan Mearns says:

      Yves, thanks for information and an interesting story. I have to admit I did get a surprise when I plotted this up to see that Yom Kippur was 1973 and price hike was 1974. Looking at the data more closely you see that it is mainly Libya and Venezuela who cut production in 1974 to yield the no production rise outcome. But then many countries cut in 1975, presumably to maintain the price. I’d need to look into the USA production and consumption pattern before saying more.

      I’m always open to myth busting 😉

      But what you’re saying is that the 1974 price hike was engineered to make Alaska and N Sea viable. In which case we may have a similar situation unfolding today where higher price is needed to provide energy security.

      • yt75 says:

        Euan, My main “point”, (more historical facts), it that the first oil shock story starts with what was then called the “energy crisis” in the US following US peak.
        This is a fact : you can find plenty of press clippings about it.
        It is also a fact that increasing price was part of US diplomacy strategy (Akins very claer about that in above quoted doc), and yes a big part of that was the need for capital expenditure to put Alaska, North sea, GOM online.
        And by the way the oil majors revenues have shoot up after the price hike.
        There was also a lot of things in parallel, the main one being the rebalance of each barrel revenues between majors and countries and the setting up of national oil companies.
        You can for instance read Maugeri chapter 8 and 9 book available on google docs :
        (the same Maugeri that produced ultra optimist reportson shale oil, but I think his historical account of the events around the first oil shock is quite interesting)
        It would also be interesting to look up about the two senators Akins is talking about related to the fact that the embargo was never effective from Saudi Arabia to the US.
        Also you can look at another doc (which I find less interesting about the first oil shock) :
        In fact an adaptation of below one :

        The key point is that this “Yom Kippur/Arab embargo” label, used extensively and now part of “common comprehension” or something has allowed to “put under the carpet” the major macro event in terms of oil market : the the number 1 producer BY FAR peaking.

        And this is still recent history for sure, but seems to me it would truly be important to bring the story as it happened back a bit …

        • Yves says:

          And I’m not saying it has been “engineered”, more than the price rise was in the interest of oil majors at the time and also pushed by US diplomacy (here again can be considered an historical fact), and that somehow the “embargo”(which was -very- relative) story has been very practical for everybody :
          1) for the US to “cover up” US peak towards US public opinion or western one in general,
          2) for the major Arab producers to show “the Arab street” that they were “doing something for the Palestinians”. (when it was not really the case …)

          The result being : What is the percentage of people knowing the date at which the top producer for the whole first part of oil history has peaked ? (1% ? 2% ? 5% ?)

          And not even talking about the whole associated “images” associated : OPEC the evil cartel and things like that, totally overlooking for the public the “friendly” or “hand in hand” relationship aspect between US/KSA or “west”/KSA for instance.

          For any “global grasp” of “peak oil” to happen, for sure this historical aspect is one of the major hurdle on the way, and it would be truly urgent to put the story (and graph labels) a bit straight ..

          • Yves says:

            And about the “energy crisis” that started much before “Yom Kippour/the embargo” following US 1970 peak, was looking for a video of a Nixon speech that I didn’t find back, but below one is also quite characteristic :

            “195 – Special Message to the Congress on Energy Resources.
            June 4, 1971


            To the Congress of the United States:

            For most of our history, a plentiful supply of energy is something the American people have taken very much for granted. In the past twenty years alone, we have been able to double our consumption of energy without exhausting the supply. But the assumption that sufficient energy will always be readily available has been brought sharply into question within the last year. The brownouts that have affected some areas of our country, the possible shortages of fuel that were threatened last fall, the sharp increases in certain fuel prices and our growing awareness of the environmental consequences of energy production have all demonstrated that we cannot take our energy supply for granted any longer.


            And below is also very clear :

  6. You made me do it… I pitched it, and keep up the good work!

  7. Luís says:

    Hi Euan, this is a very fine post, but … as I already discussed here before, you can not rely on BP’s dataset for this sort of analysis. Exports are particularly problematic, for neither the “consumption” nor the “production” series refer exclusively to petroleum, and each takes into account a different set of products (various of which are not even fossil).

    And to your point: whatever problems Saudi may come to have from this price rout, they are nothing compared to what is about to happen in the US bond market. Hold on to your hat.

    • Euan Mearns says:

      Hi Luis, I’m aware of the limitations. But what other data can be used? The EIA data is user friendly enough but begins in 1980. But even then, not all data sets start then. I guess I could check out the main conclusion which is that OPEC exports are in decline as domestic consumption eats supplies.

      So what is about to happen in the US bond market?

Comments are closed.