OPEC Erupts in Civil War

1973 was a great year for unity.

In a smoke-filled closed-door meeting, 14 people sat around a conference table. Up until that point, there was nothing but division. Each one sat in a plush chair and nodded their agreement with what had to be done.

And it was their decision that day which launched the world into its first oil shock.

Yes, 1973 was a tremendous year of unity for OPEC.

Filling the seats in the back-room conference was an oil minister from each of the twelve OPEC members at the time, as well as representatives from Egypt and Syria. After hours of what must’ve been a heated discussion, the group unanimously agreed to use its leverage and proclaim an oil embargo on several countries,

My older readers who remember those days know full well the effect of that embargo:

Crude prices surged more than 300% within a span of just six months!

What brought them together? Although the 1973 embargo was a result of the United States’ involvement in the 1973 Arab-Israeli War, it was evidence of OPEC’s (and Saudi Arabia more than anyone else) power over the global oil industry.

Today, that bond between OPEC members has eroded, and the oil cartel is quickly collapsing from within.

What we’re about to witness is nothing short of an OPEC Civil War.

A Civil War from Within

What we’ve got here is a failure to communicate.

Look, I’m not going to say that OPEC members have always seen eye-to-eye… far from it, actually.

The divisions within OPEC were shaped over the last few decades, with the tension reaching a critical breaking point. Over the years, we’ve come to watch the bickering between OPEC price hawks and doves as if it were a show.

So perhaps we can thank the House of Saud’s oil price war for the internal strife.

More specifically, we can thank its quest to retain market share after increasing production to more than 10 million barrels per day.

The effect has been devastating, and is absolutely crushing its fellow OPEC brethren like Venezuela, Iran, Iraq… anyone that is struggling to boost production right now.

It isn’t a coincidence that Saudi Arabia is willing to “freeze” output, but is still stubbornly against any production cut whatsoever.

Of course it feels that way. Over the last decade alone, the Saudis were the first to step in and replace lost production.

They were eager to step in when Libya erupted in Civil War back in 2011 and oil exports plummeted, and gladly increased production after the loss of Iraqi crude from the market.

But if you’re wondering exactly how much OPEC members are at odds with each other, just look at the fiery rhetoric taking place between Iran and the Saudis (we’ll keep Russia out of this for now). Iran is even setting its sights on taking over the European crude market.

Hey, maybe OPEC is just going through a phase.

One thing has become clear, however: OPEC doesn’t wield the same power it once did.

Looking at the Bottom of the Well

Is the writing on the wall for the oil cartel? Probably not. We’re still talking about an incredible amount of crude oil supplied by its members.

What we do know is that the internal bickering will intensify, especially as we move away from a bottom of the market.

Some members find themselves on the brink of collapse already, and no amount of oil cuts can bring them back.

All eyes may be distracted by slowing growth in China, but you don’t hear much about stronger demand growth in other emerging countries. India’s oil demand increased by approximately 300,000 barrels per day in 2015, and is growing at a pace that we saw in China years ago.

And yet, I wasn’t kidding when I told you that OPEC doesn’t have the same control that it used to. Right now, non-OPEC countries are expected to account for the largest source of supply growth between now and 2035.

Of course, by the time the rest of the market realizes this, the recovery will be in full swing.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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