The organization of petroleum exporting countries (opec) limits the amount of oil it exports:

5 OPEC as the Last Resort Oil Supplier: The Quota System

OPEC had to either stick with its official price by reducing its output or else follow the market and reduce its price to retain its share of the world oil market. OPEC chose the first option in resorting to the “quota” system, based on the concept of its member countries, as a whole, producing oil in volumes designated only to fill the gap between, on the one hand, total world demand and, on the other, world supplies from outside OPEC; that is, OPEC chose to be the last resort producer or what was termed the “swing producer.” This meant that at a certain demand level, the higher the non-OPEC supplies, the lower the OPEC total quotas. Given increasing oil supplies from outside OPEC in the face of weakening world demand, the organization's market share would correspondingly fall naturally and continuously.

Although first discussed in 1982, the OPEC quota system was formally adopted in March 1983 at an extraordinary meeting held in London that set a production ceiling of 17.5 million barrels/day, reducing the OPEC price to a unified $28/barrel. This system proved to be even more anomalous given that Saudi Arabia did not have a quota share and was left to be the “swing” producer within a range of 5 million barrels/day. OPEC decided to fix its price and take a reference price based on the crude of Arab Light API 34 f.o.b. Ras Tanura, which Saudi Arabia became committed to charging the oil companies. Meanwhile, the prices of other crudes were to be fixed upward or downward of that reference price, taking into account the quality of the crude and its geographical location in Saudi Arabia. In other words, OPEC now became the swing producer, bearing the burden of price defense at the expense of its world market share; whereas Saudi Arabia bore the brunt by becoming the swing producer within OPEC, absorbing this fall in world demand for OPEC oil far more than did the other OPEC members. This created a situation in which the 12 member countries of OPEC were producing practically the amount of oil commensurate with their allocated quotas, whereas Saudi Arabia was forced to swing downward relative to the fall in the call on total OPEC production, seeing its production in 1985 fall to approximately 2.5 million barrels/day, or roughly one-quarter of its production capacity (leaving three-quarters unproduced). The fall in Saudi Arabia's production was so great that it caused a problem of insufficiency of associated gas for the generation of electricity for water desalination plants.

With this continued decline in the call on its oil, OPEC saw its own market share fall from 62% during the mid-1970s to 37% in 1985, all as a result of increasing supplies from outside OPEC coupled with the fall in demand as a result of high prices and improving energy efficiency in industrial nations. For example, North Sea production (both British and Norwegian) leaped to 3.5 million barrels/day in 1985, up from 2.0 million barrels/day in 1975, and continued to rise thereafter. The reason behind this was that OPEC's high prices provided such a wide profit margin for oil investors that high-cost areas such as the North Sea became not only feasible but highly lucrative areas for continued reinvestment. Because OPEC adhered to the system of fixed price and swing production, any additional oil coming from outside OPEC would first capture its share in the market before buyers resorted to OPEC oil. Also, the greater the supplies of non-OPEC oil, the less OPEC oil that was on the market to meet world demand.

Furthermore, the two oil price shocks triggered enormous investments in scientific research to improve the efficiency of technology in finding, developing, and producing oil and, thus, in reducing the high cost of upstream operations in these new areas, thereby adding for the oil companies an even higher margin of profit with which to reinvest in high-cost areas.

By 1985, OPEC production was indicative of the backlash suffered by OPEC at the hands of its own price policies. In less than 6 years, OPEC's total production had fallen from 31 million barrels/day to roughly half that amount, and this led to a situation that was increasingly difficult to sustain. Consequently, things got out of hand to the point where Saudi Arabia decided to drop its system of selling oil at fixed prices in accordance with the 1973 quota system and instead adopted market-oriented pricing, or “net-back value,” meaning that it obtained the price of its crude from prevailing prices of oil products in the main consuming areas minus the cost of refining, transporting, and handling oil. Saudi Arabia's production started to rise quickly, and by the summer of 1986, a “free-for-all” situation prevailed.

6 OPEC Capacity Expansion

Over the past few years, there has been a dramatic shift in the internal politics of OPEC, reflecting changes of political leadership at the highest levels and of broader policies of key members. The result has been greater cohesion inside the producer group and a clearer articulation and implementation of goals and aspirations.

The mid-1990s were characterized by OPEC disunity and overproduction, so much so that the cartel members themselves were questioning the future viability of the organization. Venezuela's ambitious campaign to increase oil productive capacity from 2.8 million barrels/day in 1991 to 7 million barrels/day by 2010, combined with the gradual rise in Iraqi oil export rates through the auspices of the UN Oil for Food program, made it nearly impossible for the producer group to agree on a workable production sharing agreement.

During this period of the mid-1990s, market share considerations were paramount for most OPEC countries with spare capacity. Saudi Arabia, in particular, had to concern itself with both the short- and long-range implications of Venezuela's market expansion plans, which were expected to have a significant bearing on the kingdom's ability to maintain its sales to the United States. Venezuela's government was committed to supplementing state revenue by increasing oil exports and in 1992 began a new policy to allow international oil companies (IOCs) to invest in the country's once nationalized oilfields. This campaign contributed to a rise in Venezuelan output, from roughly 2.5 million barrels/day through the 1980s to between 3.5 million and 3.7 million barrels/day by 1997. Venezuela refused to comply with any OPEC production sharing agreements, greatly damaging the producer group's ability to manage oil markets and providing a strong disincentive for Saudi Arabia to contribute a large cutback in output to defend oil prices.

This political stumbling hit a dramatic snag in during 1997–1998 when an unexpected economic meltdown hit much of Asia and precipitated an unexpected drop in Asian oil use. Asian oil demand fell to 18.18 million barrels/day in 1998, down from 18.53 million barrels/day, a drop of 1.9%. This compared with a 4.5% rise in Asian oil demand between 1996 and 1997. The slowdown in Asia contributed to a major change in the global oil supply–demand balance, limiting the growth in worldwide oil demand to 74.24 million barrels/day in 1998, up only 0.5% from 1997 compared with more typical annual growth rates of 2 to 3% during the mid-1990s (Table V).

Table V. Oil Demand per Region, 1996–1998 (Million Barrels/Day)

By 1997–1998, these circumstances led oil prices to collapse below $10, requiring extraordinary efforts by both OPEC and non-OPEC countries such as Mexico and Norway. The intense financial suffering of nearly all OPEC countries and key changes in government leadership in Venezuela paved the way for a major agreement among oil producers to trim output and propel oil prices back above $22 per barrel. OPEC set a price band of $22 to $28 per barrel as its target that remained in place as of this writing.

OPEC's new, more unified dynamic is rooted in several factors:

A rise in democratization, freedom of the press and political debate, and a growing tide of anti-Americanism are bringing a greater concern for popular opinion inside OPEC countries, especially in the Middle East Gulf region, than was the case in the past. This new concern for popular sentiment is restricting the options of regional leaders to accommodate Western interests. Populations, as well as some leaders, remain bitter about the suffering that took place when oil prices collapsed during the late 1990s.

Rising populations and economic stagnation in many OPEC countries indicate that revenue pressures have been taking precedence over other considerations.

Lack of investment in infrastructure and oilfields over the years due to tight state treasuries and rising social pressures has greatly curtained OPEC's spare productive capacity, rendering it much easier for cartel members to agree to restrain output, at least in the short term.

Given this new dynamic and colored in part by the rise of Chavez as president of Venezuela, OPEC rhetoric during recent years has taken a more strident turn, with oil ministers defending their choices to attain a “fair” price for OPEC oil despite ramifications for global economic growth rates. The debate has become one of economic struggle for “rents” between oil producers who demand high revenues and major consumers whose economies can grow faster with low oil prices.

OPEC's rhetoric has generally been directed at OECD consumer governments that capture rents from oil sales through high national energy taxes. OPEC's anti-tax, anti-Western rhetoric comes against the backdrop of popular domestic sentiment inside OPEC countries that their governments are not doing enough to deliver economic benefits to a substantial portion of their populations. Leaders in OPEC countries cannot be seen as delivering benefits to Western consumers at the expense of their own citizens because such perceptions would leave regimes more vulnerable to public attack and more susceptible to the efforts of opposition parties and groups.

Although political factors have contributed to OPEC's unity over the past 2 years, the more limited amount of spare capacity that has to be held back by most member states is also a supportive factor. Indeed, oil prices tend to track changes in OPEC spare capacity quite closely (Fig. 6).

In 1985, when oil prices collapsed, OPEC was estimated to have some 15 million barrels/day of shut-in production capacity, equal to perhaps 50% of its theoretical capacity (Iran and Iraq were at war with one another at the time) and 25% of global demand. By 1990, when Iraq invaded Kuwait, spare capacity globally was still 5 million to 5.5 million barrels/day, the amount of oil taken off the market by the UN embargo. That was approximately 20% of OPEC's capacity, and 8% of global demand, at the time. During the winter of 2003, before OPEC's seasonal cuts, spare capacity was a negligible 2% of global demand, a level that left oil markets highly susceptible to disruption and supported a run-up in prices to more than $30 per barrel.

OPEC has been helped during recent years by irregularity in Iraqi production rates given the regime in Baghdad's aggressive posture to use the withdrawal of its UN-monitored oil exports as a political tool. In 2003, the U.S. military campaign in Iraq greatly curtailed the country's oil exports when facilities were looted and sabotaged in the immediate aftermath of the war. Iraq's export rates fell from just over 2 million barrels/day prior to the U.S. campaign to approximately 500,000 barrels/day in late 2003. In addition, other OPEC members have also benefited from a drop in capacity in Venezuela and Kuwait, both of which have been struggling against technical problems and natural declines in key fields. Venezuelan oil production capacity has fallen from 3.7 million barrels/day in 1998 to approximately 2.2 million barrels/day currently. Kuwait has lost capacity in certain western and northern fields such as Raudhatain, limiting its output capacity by several hundreds of thousands of barrels per day. Sustainable Kuwait capacity has recently been pegged at 2 million barrels/day.

However, the challenge to OPEC will increase during the coming years as OPEC member countries begin to anticipate an expected restoration of Iraqi capacity over time. Several individual OPEC countries have a backlog of new fields that can be brought on line soon. Several countries, such as Nigeria, Algeria, and Iran, have been quietly expanding capacity and anticipate possible production rises over the next few years. Countries such as Algeria and Nigeria, whose new fields involve foreign oil company investment, will increasingly be under additional pressure from these IOC investors to obviate OPEC agreements and allow new fields to move forward at optimum production rates. Meeting these pressures will be difficult for OPEC if market demand for its oil does not increase significantly as expected due to a slowdown in economic growth or other inhibiting factors.

Iran is forging ahead with capacity expansions and could reach more than 5 million barrels/day by 2008 based on investments through buy-back agreements with IOCs and National Iranian Oil Company investment. However, this ambitious plan will be dependent on the success of major IOC field developments, including Azadegan, South Pars, Sirri, Gagh Saran, and the Ahwaz area. Nigeria has plans to expand production in its offshore area, and this could (if successful) raise production to more than 3.5 million barrels/day by 2006.

Prior to the U.S. campaign in early 2003, Iraq had commercial export capacity of approximately 2.2 million barrels/day via Turkey and the Gulf, with additional smuggling capacity through Syria, Iran, and Jordan. U.S. officials were hopeful that Iraq would be able to resume exports at prewar levels by late 2003. Iraq has expressed a desire to expand its productive capacity to 6 million barrels/day, and analysts believe that Iraq could quickly raise its oilfield productive capacity back to 3.6 million barrels/day if security can be restored across the country and Iraq's upstream oilfield sector were opened to foreign oil company investment. However, for Iraq to be able to export these higher volumes, extensive repairs will be needed to both its oilfields and its export infrastructure.

There will be pressure inside OPEC to bring Iraq back into the production quota system as its production capacity is restored. Key members may insist that Iraq be initially limited to its historical allocation of a quota at parity with that of Iran and then hold its export increases to levels in line with market demand. However, Iraq will have pressing economic reconstruction needs to take into consideration as well, raising questions, depending on the future politics inside the country, as to whether it will be in a position to opt for policies that emphasize solidarity with OPEC.

OPEC's current capacity is estimated at 29.5 million barrels/day but could rise to as much as 36.4 million barrels/day by 2005 if new fields under development come on-line as expected. If OPEC were to expand access to foreign IOC participation, particularly in key countries now off limits to Western investment, capacity could expand to as much as 44 million barrels/day by 2010, leaving very little room for growth from non-OPEC supplies to take place without pressuring oil prices over the next 8 years or so.

3.2.2 Three-Part Cartel

OPEC is divided into three groups:

The cartel core countries: Kuwait, Libya, Qatar, Saudi Arabia, and the UAE. These countries have vast oil reserves, small populations, and flexible economic development. The core acts as the dominant firm and sets the price of oil. The cartel core nations carry excess capacity in order to maintain prices during emergency demand.

The price-maximizing countries: Algeria, Iran, and Venezuela. These countries have relatively low oil reserves and large populations with potential for economic development. These countries aim for higher prices by cutting production.

The output-maximizing countries: Ecuador, Gabon, Indonesia, Iraq, and Nigeria. They have limited reserves, large populations, and a pressing need for economic development. These countries sell at any price, even in a weak market.

Applying this model to Figs. 1 and 2 explains OPEC behavior in a way similar to that of the previous model. However, this model shows that some countries pushed for higher prices when prices declined. This situation may explain the reversal of oil prices in 1987, despite the fact that Saudi Arabia had more than doubled its production by that time.

10 Deregulation

The 1973 OPEC oil embargo exacerbated the growing shortage problem as factories switched boiler fuels from petroleum to natural gas. Cold winters further strained the nation's gas industry. The resulting energy crisis compelled consumer groups and politicians to call for changes in the regulatory system that had constricted gas production. In 1978, a new comprehensive federal gas policy dictated by the Natural Gas Policy Act (NGPA) created a new federal agency, the Federal Energy Regulatory Commission, to assume regulatory authority for the interstate gas industry.

The NGPA also included a complex system of natural gas price decontrols that sought to stimulate domestic natural gas production. These measures appeared to work almost too well and contributed to the creation of a nationwide gas supply “bubble” and lower prices. The lower prices wreaked additional havoc on the gas pipeline industry because most interstate lines were then purchasing gas from producers at high prices under long-term contracts. Some pipeline companies had also invested tremendous amounts of money in expensive supplemental gas projects such as coal gasification and liquid natural gas (LNG) importation. The long-term gas purchase contracts and heavy investments in supplemental projects contributed to the poor financial condition of many gas pipeline firms. Large gas purchasers, particularly utilities, also sought to circumvent their high-priced gas contracts with pipelines and purchase natural gas on the emerging spot market.

Once again, government was forced to act in order to bring market balance to the gas industry. Beginning in the mid-1980s, a number of FERC orders, culminating in Order 636 (and amendments), transformed interstate pipelines into virtual common carriers. This industry structural change allowed gas utilities and end-users to contract directly with producers for gas purchases. FERC continued to regulate the gas pipelines' transportation function, but pipelines ceased operating as gas merchants as they had for the previous 100 years. Restructuring of the natural gas industry continued into the early 21st century as once-independent gas pipeline firms merged into larger energy corporations.

Natural gas is a limited resource. Although it is the most clean burning of all fossil fuels, it exists in limited supply. Estimates of natural gas availability vary widely, from hundreds to thousands of years. Such estimates are dependent on technology that must be developed in order to drill for gas in more difficult geographical conditions, and actually finding the gas where it is expected to be located. Methane can also be extracted from coal, peat, and oil shale, and if these sources can be successfully utilized for methane production, the world's methane supply will be extended another 500 or more years.

Since 1970, natural gas production and consumption levels in the United States have remained reasonably stable. During the 1980s, both consumption and production levels dropped about 10% from the 1970 levels, but by the later 1990s, production and consumption were both on the rise. (see Table V). In the absence of aggressive conservation programs, unexpected shortages, or superior alternative energy sources, natural gas consumption will continue to increase.

Table V. Natural Gas Production and Consumption in the United Statesa

In millions of cubic feet.

For the foreseeable future, natural gas will continue to be used primarily for residential and commercial heating, electric power generation, and industrial heat processes. The market for methane as a transportation fuel will undoubtedly grow, but improvements in electric vehicles may well dampen any dramatic increase in demand for engines powered by natural gas. The environmental characteristics of natural gas, however, should retain this fuel's position at the forefront of desirability of all fossil fuels, while supplies last.

OPEC Integration

The tendency of OPEC national oil companies to move downstream is also an important recent change. Especially since the early 1950s, most crude oil was shipped to consuming nations and refined there. This was partly in response to the problems that resulted from the Iranian nationalization of British Petroleum holdings, including the Abadan refinery, in 1951, which led to a policy of ‘refining on the consumer's doorstep’ in many industrialized nations. Also, the development of very large crude carriers made it cheap to ship very large quantities of crude.

But as the OPEC nations gained control over their own operations, and especially as their income rose, they decided to refine their own oil where possible, partly as a corporate strategy and partly as economic development strategy. Seeking to capture the larger share of the value added to their raw materials, OPEC first sought to build export refineries on their own territory and then to buy refineries overseas in consuming nations. As Figure 4 shows, their own refinery capacity rose sharply in the late 1970s and early 1980s and then leveled off as their oil revenues weakened. Subsequently, they realized it was cheaper to buy into existing, underutilized assets in consuming nations, and Venezuela, Kuwait, and Saudi Arabia in particular have led in this regard, owning part or all of numerous refineries, especially in Europe and the United States.

Supply Side: Deregulation, International Trade and Fracking

The 1973 OPEC oil embargo exacerbated the growing shortage problem as factories switched boiler fuels from petroleum to natural gas. Cold winters further strained the nation's gas industry. The resulting energy crisis compelled consumer groups and politicians to call for changes in the regulatory system that had constricted gas production through strict price regulation. In 1978, a new comprehensive federal gas policy dictated by the Natural Gas Policy Act (NGPA) empowered the newly created Federal Energy Regulatory Commission (FERC) to assume regulatory authority for the interstate gas industry.

The NGPA also included a complex system of natural gas price decontrols that sought to stimulate domestic natural gas production. These measures appeared to work almost too well and contributed to the creation of a nationwide gas supply ‘bubble’ and lower prices. The lower prices wreaked additional havoc on the gas pipeline industry since most interstate lines were then purchasing gas from producers at high prices under long-term contracts. Some pipeline companies had also invested tremendous amounts of money in expensive supplemental gas projects such as coal gasification and importation of liquefied natural gas (LNG) from Algeria, in particular. The long-term gas purchase contracts and heavy investments in supplemental projects contributed to the poor financial condition of many gas pipeline firms. Large gas purchasers, particularly utilities, also sought to circumvent their high-priced gas contracts with pipelines and purchase natural gas on the emerging spot market.

Once again, government was forced to act in order to bring market balance to the gas industry. Beginning in the mid-1980s, a number of FERC Orders culminating in Order 636 (and amendments) transformed interstate pipelines into contract carriers as opposed to merchants. This industry structural change allowed gas utilities and end-users to contract directly with producers for gas purchases, thereby essentially eliminating gas pipelines as purchasers and resellers of natural gas. FERC continued to regulate the gas pipelines’ transportation function, and pipelines ceased operating as gas merchants like they had for the previous one hundred years. Restructuring of the natural gas industry continued into the early twenty-first century as once independent gas pipeline firms merged into larger energy corporations.

Deregulation contributed to the policy makers’ desired outcome of increased supply. Since 1970, natural gas production and consumption levels in the United States remained reasonably stable. During the 1980s, both consumption and production levels did drop about ten percent from they 1970 levels, but by the later 1990s production and consumption were both on the rise. (Table 5) Although production and consumption levels were relatively stable during the l980s and 1990s, they increased markedly in 2007–8 and imports rose as well. In the absence of aggressive conservation programs, unexpected shortages or superior alternative energy sources, natural gas consumption will likely continue to increase.

Table 5. United States Natural Gas Production, Consumption & Imports (million cubic feet)

Source: Energy Information Agency, “Supply and Disposition of Natural Gas in the United States, 1930–2000,” Historical Natural Gas Annual and EIA online.

Internationally, natural gas markets have continued to expand and in some cases have become highly politicized. Russia has the largest gas reserves in the world, about 1680 TCF, most of which is located in Siberia; Russian natural gas reserves also represent approximately twenty-five percent of worldwide reserves. Russia is the second largest producer of natural gas, after the United States, and the Russian economy is highly dependent on natural gas and oil exports. The Russian firm, Gazprom is one of the largest corporations in the world, and it dominates the Russian natural gas production sector. Russian gas pipelines have been involved in highly political disputes regarding gas pricing as in the case of Belarus and the Ukraine in 2006.

By the end of the twentieth century, industry analysts and policy makers had almost uniformly suggested that the end of the fossil fuel era was well in sight. Natural gas and oil would be significantly depleted within decades and certainly by the mid to late twenty-first century. But the continuing decline in ‘conventional gas’ (large accumulations of natural gas found in porous zones of folding or faulting rock formations) has led to a dramatic increase in the successful production of so-called ‘unconventional gas.’ Unconventional gas, also referred to as shale gas, tight gas or coal bed gas, is gas that is trapped in impermeable formations that can be released and produced through newer production technologies. These new technologies include horizontal drilling and the process known as (hydraulic) fracking. Horizontal drilling involves drilling to a particular depth and then turning the well by as much as 90°; the drill can then move horizontally through the reservoir. The fracking process is typically accomplished in conjunction with horizontal drilling and requires injecting huge amounts of specially produced fluids at extremely high pressure through the well. The fluid fractures the shale and allows the trapped hydrocarbons to flow to and through the well. According to the Energy Information Agency (EIA), fracking has resulted in an eightfold increase in shale gas production; this technology has helped to reinvigorate the U.S. natural gas industry.

Controversy surrounds the environmental characteristics of fracking. The possibility of groundwater contamination by the fracking fluid is a primary concern. Additional issues include the tremendous amount of water used, and lost, in the process as well as the secondary issue of the energy used overall in the production of natural gas through fracking. Absent a catastrophic episode or major groundwater contamination, it is likely that fracking will continue, particularly in deep wells. Fracking portends to extend the supply and utilization of natural gas for many decades although oil and coal will continue to be the dominant fossil fuels.

For the foreseeable future, natural gas will continue to be used for residential and commercial heating, electric power generation, and industrial heat processes. The market for methane as a transportation fuel will undoubtedly grow, but improvements in electric vehicles may well dampen any dramatic increase in natural gas powered engines. The environmental characteristics of natural gas, however, should retain this fuel's position at the forefront of all fossil fuels while supplies last.

Natural gas continues to be a limited resource, but it is also the most-clean burning of all fossil fuels. Estimates of natural gas availability vary from many decades to hundreds of years. Such estimates are dependent upon the technology that must be developed in order to drill for gas in more difficult geographical conditions and actually finding the gas where it is expected to be located. Despite the success of unconventional gas production technologies, the very long-term natural gas supply situation remains a question. New energy sources, particularly solar, wind and to a lesser extent geothermal, will undoubtedly gradually increase their energy market share, and pricing as well as supply will be determining factors. For the foreseeable, natural gas continues to remain a highly viable, environmentally friendly and efficient fuel. The EIA expects demand to increase annually by 0.7 % over the next 26 years.

1.6 OPEC Integration

The tendency of OPEC national oil companies to move downstream is also an important recent change. Especially since the early 1950s, most crude oil was shipped to consuming nations and refined there. This was partly in response to the problems that resulted from the Iranian nationalization of British Petroleum holdings, including the Abadan refinery, in 1951, which led to a policy of “refining on the consumer's doorstep” in many industrialized nations. Also, the development of Very Large Crude Carriers made it cheap to ship very large quantities of crude.

However, as the OPEC nations gained control over their own operations, and especially as their income rose, they decided to refine their own oil where possible, partly as a corporate strategy and partly as an economic development strategy. Seeking to capture the larger share of the value added to their raw materials, OPEC countries first sought to build export refineries on their own territory and then to buy refineries overseas in consuming nations. As Fig. 4 shows, their own refinery capacity rose sharply in the late 1970s and early 1980s and then leveled off as their oil revenues weakened. Subsequently, they realized that it was cheaper to buy into existing, underutilized assets in consuming nations, and Venezuela, Kuwait, and Saudi Arabia in particular have led in this regard, owning part or all of numerous refineries, especially in Europe and the United States.

5.9.6 OPEC's waning power?

At their November 2014 meeting, OPEC decided to maintain production in the face of stalled global demand and increased US shale oil production volumes. This strategy, which defied all classical economic knowledge of decreasing production when demand weakens in order to maintain price, was largely at the behest of Saudi Arabia and was designed to choke off the US shale producers.

This strategy backfired spectacularly as oil prices plunged to record lows during the first half of 2015, events which also conspired to hurt those OPEC producer countries that have more structural domestic economic issues, such as Nigeria and Venezuela. Undoubtedly, the price falls did cause some small scale shale oil producers in the US to shut up shop but more decided to mothball or merge to ride out the low price storm.

In November 2016, OEC decided upon a 6-moth production cut to shore up prices, and then bring alongside non-OPEC production cuts in December 2017, including a Russian promise to cut some 500,000 bpd of oil production in a last bid to stabilize and give support to price levels in the oil markets.

Perversely, by cutting back on production that naturally means that prices must rise to satisfy demand if that is assumed to stay static, is a consequence that also benefits US shale producers, who need higher prices to compensate them for higher production costs than the traditional oil field owners in the Middle East.

OPEC has limited means at its disposal now to influence the market. Saudi Arabia, for long the world's “swing” oil producer able to either flood or restrict the market, no longer holds that sway. US shale producers are adept at turning on and off the taps and can do it far quicker than conventional oil field drillers. Continued efforts to reduce production by OPEC will be compensated by the USA ramping up production, motivated by President Trump's desire to reduce energy dependence on Arab oil. OPEC, and especially Saudi Arabia, is now caught in the crossfire within a battle they started.

Despite the rhetoric emanating from the Middle East that non-OPEC producers are “free-riding” on the more buoyant prices engendered by OPEC policy of production cuts, it is now hard to see how OPEC can wrest back control of, and influence over, the global free market for oil. Increasing prices will reduce oil revenues for many OPEC country economies that are overreliant on the petro-dollars to fund their fiscal budgets; there is no longer any certainty that US shale producers will be forever disadvantaged, they have already shown remarkable resilience and will be better placed the next time around.

OPEC now controls just one-third of the world's oil output, its smallest share for almost 30 years. Increasingly the cohesion that has held OPEC together since its formation in 1960 is showing signs of strain. Only Saudi Arabia now has the spare production capacity to influence the market; some OPEC countries, such as Nigeria, are exempt from the production cutting strategy; will the Saudi-Russian concord on production restrictions stand a test of time? The balance of power has inexorably shifted, and the world can no longer be held hostage to oil supply restrictions and high prices as it once was in 1973.

1.2.1 The Impact of the OPEC Oil Embargoes

The 1973 oil embargo by OPEC sent world oil prices soaring. In reaction to the embargo, in 1975 at Gerald Ford's urging, Congress passed the Energy Policy and Conservation Act, which established Corporate Average Fuel Economy (CAFE) standards for automobiles, extended domestic oil price controls, and created the Strategic Petroleum Reserve, an oil stockpile for emergency situations. Two years later, Congress created the Department of Energy (DOE).

Jimmy Carter was convinced that the nation's energy security demanded a comprehensive energy plan. Carter's 1978 National Energy Plan was the first attempt by a president to establish a national energy policy, one that called for both expanded production of coal and enhanced energy conservation. The plan included numerous measures for the promotion of renewable energies, provisions for energy conservation, and energy taxes. It also led to the establishment of the Public Utilities Regulatory Act, which required utilities to purchase energy from “qualifying facilities,” effectively ending the electric utility monopoly on electricity production and helping to foster a market for renewable energy sources.