In October 1973, the member countries of the Organisation of Arab Oil Exporting Countries proclaimed an oil embargo. A coalition of Arab countries had attacked the state of Israel. After first advances were beaten back by the much smaller Israeli forces. This incensed the rest of the Arab and Islamic world. As a response, they embargoed nations that were perceived as supporting Israel.
By the end of the embargo 6 months later the oil price had risen 400%. It produced the first oil shock. It also demonstrated the immense weight the new organization had in international politics and on the global economy.
The 1979 oil crisis produced another such oil shock. It cemented OPEC as the “Alpha leader” of the oil-producing world. Ever since leaders of the West cozied up to the leaders of the principal member countries to prevent them from turning the knob again.
In my personal life, OPEC has been one of the eternal guiding lights of geopolitics. I cannot even remember a time when it has not been a decisive factor.
But already in 1973, with this first embargo, the OPEC nations set things in motion that should prove to become their undoing.
Playing with the oil lever was perceived to be a great tool to get what you want if those Western leaders played too hard a game. Pretty soon OPEC nations also found out that managing the flow of oil would be a great way to manage the market and drive prices up.
That being said, even early leaders of OPEC were aware that driving prices too high would result in demand destruction. Thus they opened the can on a new field of research. They wanted to predict how high prices could be driven without unleashing the dogs of demand destruction. And this science has become an obsession in OPEC as they analyze every minute movement in the market to write about it in thick reports.
Pretty good stuff if one is to read all the data OPEC produces.
But like every big, well funded international organization, this beast took on a life on its own. The simple and enticing framework gave OPEC leaders a good yardstick with which to measure the market and find decisions. Now it had become an unwieldy, bureaucratic monster. It is now so cumbersome that they can hardly react to anything the market does anymore.
Because there is one thing that is hard to cast into numbers and tables. The raw power of people looking for a way out when they are in hurt.
And the world has been in hurt for a long time. Early OPEC leaders were aware that higher prices would hurt their business in the long run. But soon, more and more domestic problems in oil-producing nations are being camouflaged with oil money. Nobody wanted to have a stab at solving them for real.
Imagine yourself in a position of great power. You control this never-ceasing fountain of riches which is oil. As your country lives through its challenges, you find out that throwing money at the problem until it goes away is an easy way to run things. So, that’s what you do and before you know it, this becomes the default way of solving problems.
This also leaves problems unsolved and feeds an insatiable monster. The populace that has gotten used to freebies and now it is hard to wean it off those goodies again. Now, the endless supply of money did not look so endless anymore.
So, they went on to consult the oracle.
How far could they drive prices up before they produced other, worse problems?
But who is the Oracle?
Its a collection of priced specialists. And what those specialists did was reading their masters minds. They tried to find ways how to justify ever-higher prices. There was a time when USD 30.- was considered to be the high end for some nations. No more.
What could be used as a political weapon in the beginning now became the Achilles heel of oil producers.
Everything that threatened demand was a mortal threat to themselves. Because if prices are too low for too long a time, their entire states will disintegrate. They were hooked on easy oil money now.
This was hard enough for many of them to handle. But there was still the notion that oil growth would only come from OPEC nations and a few others. It was always considered that Noth America, Europe, and Asia would need ever more oil and hence they could not go astray.
And then shale happened. In a sense, shale is the consequence of high prices. Nobody would have spent time and money had they not been sure that those high prices ensured a much bigger reward later. They wanted to know that this shale thing would allow them to break even on this lesser resource.
You will say now that 20 years ago shale was still an oddity. The costs of shale extraction were still a fair bit higher than even the high end of price projections would allow for. Fair enough, but this is exactly the nature of entrepreneurs. They don’t see those costs as a monolith. They see it as something to work on, to make them small enough for a possible profit in the future. Anyway, the oil business had a stone old business model that was ripe for disruption.
The attacks on a Saudi oil facility a few days ago have reminded us of the value of having production right at home. Not only does it produce jobs and investment in your own country. Not only are you saving on transport. Not only do you have better security of supply and insulation from market shocks.
You also operate in an environment where civil infrastructure works without any upgrading. No deep Arctic where even the most basic stuff needs to transport from afar. No deserts or jungles far from civilization where even water needs complicated logistics. No threats of war or political uncertainties of governments changing their minds. No blackmailing of operators into changing the deal after the investment.
Shale is not the monolith NOPEC is today. Its a myriad of operators, some big, many small, where each of them does whatever they need to do to survive. How do you deal with an opponent like this?
NOPEC is in a battle with a nebulous opponent. A battle with an opponent it cannot understand or even perceive for what it is. NOPEC countries need their oil money for their own survival. All their stratagems to retake the initiative are fraught with failure.
NOPEC is no longer the meanest dog in the kennel. Their member countries lose their nerves and start to sell the family silverware. And when they do, the world will find out what it knew all along. That they are dealing with a spent force.
NOPEC fights the last battle in a war that it cannot win. A war it started during those fateful days in October 1973.