Venezuela’s current political and economic crisis encapsulates the hard times that some major oil-producing countries are experiencing these days. The high revenues of the years 2008 through 2014, when prices stood at well over USD 100 per barrel (USD p.b.), have fostered mismanagement and corruption in many petro-economies. After the collapse of prices in late 2014, societal expectations of state services could often no longer be fulfilled. Ever since, governments have been coming under increasing pressure.

Against this background, the Organization of Petroleum Exporting Countries (OPEC), together with 11 other oil producers, decided in November 2016 to throttle extraction rates to achieve a price increase. Despite widespread expectations among many experts to the contrary, the group has so far largely succeeded in meeting its commitments and demonstrating the ability to act. However, it is still too soon to determine whether this will ease market tensions in the long run.

Changes in the Oil Market

Developments in the global oil market over the past decades can be broken down into three phases. Starting from a phase of relative stability pre-2004, when prices usually peaked at below USD 30 p.b., 2005 saw the start of a phase of high price volatility, which was seen as caused by the growth of emerging economies and the resulting shortage of supply. A high-water mark of nearly USD 150 p.b. was reached in early 2008, followed by a price collapse in the wake of the global economic crisis. A third phase can now be discerned since the beginning of 2015, with price levels remaining largely below USD 50 p.b., a clear oversupply on the oil market, and the accumulation of massive stocks. The main drivers in the current situation are the considerable expansion of shale oil production in the US and a stronger-than-expected decline in demand pressure, caused by a reduction of energy intensity in the manufacturing sectors of emerging economies.

Without question, the main factor of change is to be found in the US. After seeing a decline in production from about 2.5 billion barrels annually in the 1980s to 1.8 billion barrels around the year 2005, the country had already begun strategic preparations for a noticeable increase of import dependency. However, beginning in 2008, the development of new extraction techniques and an advantageous regulatory framework favored a strong increase in oil production from unconventional sources. By 2015, at 3.5 billion barrels annually, the US was producing more oil than ever before. At the end of that year, it lifted the export ban on crude oil, which had been in force since the first oil crisis of 1973, reflecting a changed perspective on oil markets. The new administration of US President Donald Trump even went one step further and has recently labeled its new approach “energy dominance”.

The US shale oil industry is characterized not only by rapid growth, but also by sensitivity to short-term price fluctuations and the flexible nature of the many small independent companies operating thousands of wellheads. For instance, the abrupt collapse of prices in 2014 brought a swift consolidation of the market, together with a series of bankruptcies. However, production picked up again nearly as quickly in 2016; this time, the cost per drill site had been reduced by one third, and the productivity of each individual wellhead had been doubled. Thus, since 2014, the US shale oil industry has established itself as the third important collective actor, next to the politically controlled state companies of OPEC member countries and the major Western oil and gas companies. However, the shale oil industry operates largely independently of the political sphere, responding primarily to price signals.

While structural changes have strongly influenced the supply side in the past decade, demand appeared rather stable. Although oil consumption has most recently dropped below predictions, a decline of global demand on the scale required for climate protection is not yet apparent. Nevertheless, demand in 2015 and 2016 plainly lagged behind the rapid increase of supply, suggesting, despite the absence of hard data, that global oil stocks are at an all-time high. One indication of temporary oversupply is the fact that political crises in and between oil-producing countries, such as the Saudi embargo against Qatar or the independence referendum in the oil-rich Kurdish region of Iraq and the subsequent conflict over the oil wells near Kirkuk, had little long-term effect on prices.

OPEC in Transition

Since the foundation of OPEC in 1960 and the first oil crisis of 1973–4, the cartel of oil producers has been the point of reference when it comes to geopolitical developments in the oil market. From its foundation, the organization has had the stated aim of applying political pressure to control production quotas and prices. The first successful example of such pressure was the boycott against Western supporters of Israel in the 1973 Yom Kippur War.

However, when considering OPEC’s role as a mighty oil cartel, observers often underestimate the heterogeneity of its membership. A huge imbalance of power and influence between the rich states of the Persian Gulf, which have high output and benefit from low extraction costs, and the poor oil-producing states of South America and Africa, where costs are high and production is low, has become more and more obvious in recent years. In addition, OPEC is riven by severe clashes of interest and political conflicts, which are most palpably manifested in the decades-old hostility between two major producers, Iran and Saudi Arabia. This is why experts have argued for years over whether OPEC, given its limited share of global supply and its internal conflicts, should even be considered a “cartel” anymore. What seems certain, however, is that Saudi Arabia alone, as the biggest OPEC producer and accounting for one third of the organization’s output, is the only actor able to affect the global oil market individually by expanding or throttling its flexible production volume.

Between the 1970s and the mid-2000s, the global oil supply system gradually adopted a governance structure that was shaped on the producer side by OPEC, its main member Saudi Arabia, and its flexible output. On the consumer side, the International Energy Agency (IEA) was created as the institutionalized representation of the Western consumer states. However, in practical terms, the US with its strategic oil reserve, with its military presence in the Middle East, and acting as the guarantor of maritime trade routes ensured that the overall system operated smoothly. European and Asian industrialized nations benefited from the mutual arrangements between the energy heavyweight and the military superpower without being required to contribute significantly themselves.

The huge growth in Asia’s emerging economies in particular and the shale oil revolution in the US have eroded these governance structures over the past decade: The IEA and the US no longer represent the spectrum of consumers, nor does OPEC control the lion’s share of production. The US-led invasion of Iraq in 2003 seems to have rung the death-knell for US efforts to safeguard energy interests by military means in the Middle East. With the rapid growth of production in the US, securing access to regional oil sources will likely become less important to Washington, at least in the medium term.

From the perspective of the consumer states, the challenges posed by the development of prices and market fluctuations are mainly economic in nature; but for many governments in oil-producing states, these are questions of political survival. Following the price collapse of late 2014, many OPEC states vocally and urgently demanded measures to stabilize oil prices on a higher level. A strategic decision by the Saudi royal family reflects the extent to which interests within OPEC are currently diverging: Rather than responding to increased US shale oil extraction by cutting its own production rates and thus stabilizing prices, Saudi Arabia maintained its high production rates in order to undercut its new competitor across the Atlantic with low prices and thus assert its own predominance on the oil market.

However, the Saudi refusal to throttle production was not only aimed at the new competitors in the US: After the recent lifting of US sanctions, it wanted to ensure that Iran would be prevented from making urgently needed investments in its obsolete oil industry, and would thus be economically contained.