Saudis are blackmailing the world by threatening to leave OPEC

12.11.2018

Saudi Arabia instructed the Council of the King Abdullah Center for the Study of Oil Research to find out what will happen if tomorrow OPEC ceases to exist. And although now the collapse of the cartel, which has been setting world oil prices for almost 60 years, seems unlikely, they decided to play it safe in Riyadh and calculate alternative options.

One of the objectives of the Saudi study is to understand what kind of defensive position the kingdom can take in view of possible difficulties due to the murder of journalist Jamal Hashkaji, which was an excellent reason to punish Riyadh for “colluding” with Russia behind the back of the US and the rest of the oil importing world. After all, the agreements - both bilateral and within OPEC + - allowed not only to raise oil prices to an acceptable level of $ 70-80 per barrel, but also, most importantly, to show that Russia and Saudi Arabia, ideological enemies, are very capable to negotiate when it affects the economic interests of both states. And what's more, these very agreements are honored.

A small but extremely indicative nuance - not one of the OPEC countries for the first time in the entire history of such agreements violated them and did not supply oil to the market more than was agreed: last year and this year all deliveries were strictly quotas, no one thought violate the agreements reached. Before that, for more than half a century, the cartel members invariably tried to sell more oil than they were supposed to according to the quotas set by the organization. By and large, the rest of the cartel’s members were made to earn by the Saudis, who deliberately lowered their own oil exports in exchange for high prices for all of them. Now, it seems, the rules of the game have changed: OPEC has managed to launch quota mechanisms in a regular uninterrupted mode.

What if...

But, having doubted whether the collapse of OPEC is possible in the near future, let's assume that the cartel no longer exists. What will happen to world prices not oil then?

If the collapse of OPEC happens relatively quickly, when no one will expect such a turn of events, then, as is the case with any shocks of this kind, oil prices will inevitably rise. And the further will depend on how exactly the states left without a single organization will be able to agree among themselves.

The first scenario: these countries create a new organization with the same functions and tasks as OPEC, but under a different sign, at the same time canceling the long-term obligations of the current cartel.

The second option: under the pretext of reforming the country, the ex-OPEC will get rid of one of the current members of the organization, “swinging the boat”.

Third: oil-producing countries will create several “OPECs”, each of which will try to pull the blanket over itself, and with time a certain balance will be established. There is now, for example, OAPEC (Organization of Arab Petroleum Exporting Countries), which may well be repurposed and, instead of developing oil infrastructure within the countries of the region, also deal with hilling up of oil prices in the world.

Fourth: for a long time, the world will remain without a coordinating cartel, each country will sell oil at its own discretion. Prices will collapse, which will hit the economies of all these countries reveling in independence.

There are other options whereby organizations such as OPEC will not be created, and some of its former participants will join the new organization, which will be led by someone from non-cartel countries. But this development seems fantastic: it’s just that no one will give up power, even if it has been fairly blurred in recent years.