Russia at war with OPEC

It is necessary to conjugate the striking force of OPEC in the past. This group of countries that used to meet in Vienna, deciding unanimously to reduce their production and using their monopoly to drive up oil prices to the detriment of nations and continents eager to consume it, no longer impresses much. How distant that era seems, starting in 1973, when OPEC, followed by a few non-member countries, caused the first oil shock. Today, its members realize an obvious fact: maintaining a cartel regime is quite complicated.

The temptation is too great for each member to break the solidarity that is the essence of a cartel when there is an opportunity to earn more by selling more. Defections are simply human when profits can be increased by offering a slight discount to buyers, and in the absence of a mechanism that prevents and punishes such misconduct. Thanks to its vast reserves, making it the largest producer in the Organization, and especially thanks to its extraction costs being significantly lower than those of other members, traditionally, Saudi Arabia was the variable adjustment. It had the power to exert intense downward pressure on prices by opening its taps wide, thus delivering a harsh lesson by compressing the revenues of countries that did not respect their quotas. These potential retaliatory measures by Saudi Arabia gave it real power within OPEC because it was the nation that could flood the market overnight while preserving its own interests, but with a significant capacity to harm those who did not play by the rules.

However, the power dynamics of this cartel have shifted with the integration of Russia into what became OPEC+ in 2016. It was meant to cement the absolute dominance of the oil market by this cartel and serve as an effective bulwark against any indiscipline from members who would then face retaliatory measures from this all-powerful group. The capping of oil prices by the G7, the European Union, and Australia, combined with an alliance comprising China and India, have disrupted the very structure of this market. Now, it is the buyers – not the sellers – who dictate their conditions!

Indeed, Russia, which needs immediate and vital liquidity to finance its war machine in the face of unprecedented sanctions, can no longer perceive the market through the same lens as other OPEC members. Unable to afford the luxury of long-term thinking or playing the game of reducing its production to reap future benefits, Russia has managed to increase its production levels to those before the war in Ukraine and even before the COVID-19 pandemic, reaching 600,000 barrels per day. The substantial price reductions it is forced to grant to China and India (its only buyers as the West boycotts it), who now account for 90% of its exports, allow Russia to keep its head above water to some extent. This explains why its oil revenues have plummeted by around 30% despite a significant increase in production.

In an almost desperate attempt to counter the effects of this Russian defection (and other oil-exporting countries in Africa following suit), which is causing widespread downward pressure on oil prices, Saudi Arabia is reducing its own production to stabilize, or even reverse, the market. However, it will not succeed because the former cooperation within OPEC is a thing of the past, and the reduction in its production will only result in decreasing its own revenues. Who could have predicted that the war in Ukraine would lead to a new era of significantly lower oil prices?