OPEC's clout on line as decisive meeting looms
AUSTIN — Demona Regallado happily filled the gas tank of her minivan at a Shell station Friday morning with $2.51-a-gallon regular unleaded. It was the lowest she remembered paying for gas in years.
Regallado couldn't say what, precisely, was causing the plummeting gas prices or what OPEC was ("something to do with oil") or what impact the acronym may have on her monthly gas bills. All she knew was the cheap gas pouring into her minivan.
"It's amazing," Regallado, 52, said. "I could spend money on other things and afford to pay my bills a little easier."
OPEC — the Organization of the Petroleum Exporting Countries — is a 12-state organization of oil-pumping countries and an economic cartel that coordinates policies and influences world oil prices. Members include Saudi Arabia, Kuwait, Iran, Iraq, Venezuela and other countries. Once a household name and perennial boogeyman in relation to oil prices, the group may be slowly losing its sway, some analysts say.
OPEC leaders will meet Thursday in Vienna to consider cutting output to shore up prices. The price of benchmark West Texas Intermediate crude has dropped more than 30% the past few months, from more than $100 a barrel this summer to $75 a barrel this week. The drop is attributed to increased oil production from North America, among other factors.
If OPEC doesn't curb production, WTI crude is likely to drop into the $60 per barrel range and possibly lower. This will make it tougher for independent producers to launch new drilling projects in places like the Eagle Ford Shale in South Texas or the Bakken formation of North Dakota because they rely on high returns to finance the costly penetration and oil harvesting in those formations. If OPEC agrees to a cut, the crude could climb to $80 a barrel until production levels are confirmed early next year. The cartel would need to cut production by more than 1 million barrels a day to make any difference, analysts say.
Though nice at the pump, a prolonged descent of crude prices could hurt the oil and gas industry and rattle the U.S. economy.
Still, with U.S. production surging to record highs and global demand softening, OPEC's relevance and power may be slipping and the group may be shifting its long-term goals. Bolstered by shale drilling in Texas and North Dakota, U.S. production surpassed 9 million barrels a day this month — the highest mark since the U.S. Energy Information Administration began reporting rates in 1983.
No longer just a pawn in OPEC's geopolitical moves, the U.S. is controlling much of its destiny with its increased production, said Dominick Chirichella, founding partner of the New York-based Energy Management Institute, which provides market analysis of the industry. U.S. production, along with increased production in Canada, Brazil and the Caspian Sea region, is challenging OPEC's traditional dominance, he said.
"They're much less relevant," he said. "It's a whole new oil world we're heading into."
OPEC nations, led by Saudi Arabia's 9.7 million barrels a day, still produce around 40% of the world's oil and hold 80% of its oil reserves, making its moves significant.
But some analysts and industry executives agree that the energy cartel no longer wields the same influence it did in the 1970s and '80s, when its decisions rattled world markets. The 1973 oil embargo by Middle Eastern OPEC nations in response to the Yom Kippur war sent gas prices soaring and led to a global economic recession. OPEC, led by Saudi Arabia, its largest producer, has cut or increased production in ensuing years, responding to fluctuating crude prices.
David Ottaway, a senior scholar at the Wilson Center's Middle East Program, remembers traveling to Saudi Arabia in 1986 on a trip with then-vice president George H.W. Bush, who was urging Saudi leaders to push up the price of oil. That type of high-level courting of OPEC is less necessary today, he said.
OPEC today has to deal with member countries facing stiff political and economic challenges at home, such as Venezuela and Iran, which may not readily oblige by the cartel's policy shifts if they hurt their economies, he said. Thursday's meeting could signal not just the group's oil strategies but the internal relationships and new direction of the group.
"This is a crucial moment for OPEC and how it's going to deal with short-term glut and whether they can deal with the long-term threat of much greater U.S. oil production," Ottaway said. "It's a time of testing for OPEC."
Thursday's meeting is being touted as one of the most significant — and contentious — in OPEC's recent history. In a survey of 20 energy analysts done last week by Bloomberg News, half of them forecast the group will cut production while the other half expected no change. It was the first time in the seven years the news outlet has conducted the survey that the interviewees were evenly split.
At the meeting, OPEC will have a defining decision to make: cut production to raise prices and reap the rewards or keep them low enough to make it hard for U.S. producers to expand operations, at the expense of member countries, said Michael Webber, deputy director at the Energy Institute at the University of Texas-Austin. The Saudis' moves seem particularly aimed at U.S. producers in South Texas' Eagle Ford Shale or North Dakota's Bakken formation, which is harder and more expensive to harvest, he said.
OPEC is still relevant, but in different ways, Webber said. "We're not going to jump every time they sneeze, but we're still pretty tuned in to what they're going to decide," he said. "They're a big gorilla. They're just not the only big gorilla."
Regarding Thursday's meeting, he added: "It's a big one for world oil prices and it's a big one for whether OPEC stays together, but we're more insulated from its decision than we have been in decades. It's not going to hurt us the way it has in the past."
Mark Plummer, founder and chief executive of Chestnut Exploration and Production in Richardson, Texas, north of Dallas, said he monitors OPEC's moves closely. He has witnessed over the years how the group influenced markets through policy decisions. He isn't alone. As crude prices began dropping this fall, his wife asked if it was a result of OPEC, he said.
"Everybody that's in the business follows OPEC," Plummer said. "You need to keep track of what they're doing."
Jonathan Sloan, director of Houston-based Catalyst Energy Advisors, warned not to underestimate the energy cartel's influence, especially if they choose this week to not cut production and to allow crude's continued price free fall.
"If the Saudis and the others stand firm, the 27th is going to be an unhappy Thanksgiving for a lot of people," he said. "They absolutely matter."