The union of petroleum-exporting countries, known as OPEC to the world, has for years been the key determinant in all developments involving oil. Thanks to their rich deposits these countries were previously able to determine supply and pricing, and the rest of the world had no choice but to agree. However, the oil troubles of the past two years show one very important thing: OPEC doesn’t rule over oil anymore.
Back in the day oil extraction was a costly process. Since OPEC member states have the biggest crude oil deposits, they were in charge of pricing. However, recently the United States developed a much cheaper method of shale oil extraction. This allows the US to keep pumping oil even if its price is low; in contrast, low prices are disastrous for OPEC because of the high production cost of oil for them.
After finding the world oversupplied with oil two years ago, the price of the black gold dropped significantly. It has been fluctuating up and down since then with every bit of news about oil extraction policies and developments. OPEC members were able to reach a tough agreement to reduce the amount of oil they extract in order to fight the oversupply and gradually stabilize prices. They even managed to agree to continue this policy into 2018. Nevertheless, the United States are not in OPEC and are thereby not bound by this agreement, and they are not afraid of lower prices. That’s why the increased oil extraction in the US has basically made OPEC’s hard efforts futile.
It appears that the tables have turned. The once all-powerful OPEC was forced to admit defeat. Earlier this month OPEC officially begged the United States to reduce its oil extraction, which confirmed where the true power lies these days.
Things have gotten so bad that Saudi Arabia is currently in the process of devising a wide range of reforms that are supposed to transform the country’s economy. Currently, its GDP is almost entirely dependent on income from oil exports, so the low prices have hit the Saudis hard. With this new plan called Vision 2030, the country hopes to free itself from its oil dependence. In an interview for CNN the finance minister of Saudi Arabi Mohammed Al Jadaan stated that the fiscal reforms are so expansive that if successful, by 2030 he “wouldn’t care if the oil price is zero.”
So there you have it: the current king of oil is the US. Trump’s administration is also helping in that respect, since the President hopes to keep increasing oil production. As long as he gets his way, expect the States to continue ruling the oil market. Conversely, if there’s trouble in the US, expect volatility in the oil market.
