Crude oil holds the most prominent position in the global commodities market as oil price changes impact the way the world economy operates. Among others, the crude oil prices are largely dependent on two factors: geopolitical developments and economic events. These two factors lead to changes in oil supply levels from the major oil producers which result in oil price fluctuations.
For instance, the 1973 Arab oil embargo, the 1980 Iran-Iraq war and the 1990 gulf war are some of the historical geopolitical developments which have impacted oil prices significantly. Similarly, the Asian financial crisis of 1997, the global financial crisis of 2008 – 09, and the current continuing state of continued oil oversupply from OPEC are major economic events which have impacted oil prices significantly. (For more, see: What Determines Oil Prices?)
The two prominent groups which own the majority of global oil production are the Organization of Petroleum Exporting Countries (OPEC), and the non-OPEC group of nations. Amid the highly dynamic economic and geopolitical developments, these groups make changes to their oil production capacities, which impact the oil supply levels and results in volatility in oil prices. For instance, the recent decision to continue with the oil oversupply by the OPEC group primarily driven by its largest member, Saudi Arabia, has resulted in rock bottom oil prices of the last 12 years.
Let’s look at how, and to what extent, the production levels of oil from these two groups impact the oil prices.
How Does OPEC Production Impact Oil Prices?
The market share of OPEC-produced oil in the global oil market keeps hovering around 40%. For instance, the International Energy Agency (IEA) provides the following representation of OPEC oil share in the global market between 2013 and 2015:
OPEC-exported oil accounts for around 60% of the global oil trade, which indicates its dominant position in the global oil market. IEA also reports that 81% of the world’s proven crude oil reserves lie within the boundaries of the OPEC nations. Of that, around two-thirds lie within the Middle Eastern region. Additionally, all OPEC member nations have been continuously improving on technology and enhancing explorations leading to further enhancements to their oil production capacities at reduced operational costs.
OPEC remains influential due to three primary factors: an absence of alternative sources equivalent to its dominant position, a lack of economically feasible alternatives to crude oil in the energy sector, and the comparatively low-cost price advantage against the relatively high-cost non-OPEC production. (For related reading, see: The Cost of Shale Oil Versus Conventional Oil.)
OPEC has the economic capability to disrupt or enhance the supply of oil to substantial levels at any time, severely affecting the oil prices. The 1973 Arab oil embargo saw prices quadrupling from $3 to $12 per barrel, while the recent ongoing oversupply has brought down prices from $100 a year before to present-day $28 per barrel.
Within the OPEC group, Saudi Arabia is the largest crude oil producer in the world, and remains the most dominant member of OPEC. (For more, see: How Saudi Domestic Policy Shapes OPEC's Production.)
A representation from EIA indicates that each instance of a cut in oil production by Saudi Arabia has resulted in a sharp rise in oil prices, and vice versa.
Prior to 2000, all historical instances since the 1973 Arab oil embargo indicate that Saudi Arabia has managed to maintain its upper hand in the oil market. It calls the shots in determining crude oil prices by controlling the supply. All major oil price fluctuations can be clearly attributed to production levels from Saudi Arabia, along with other OPEC nations.
Does Non-OPEC Production Impact Oil Prices?
Non-OPEC oil producers include other crude oil producing nations outside of the OPEC group, and those producing shale oil.
Interestingly, five out of the top 10 oil-producing countries include non-OPEC nations like Russia, the U.S., China, Canada and Mexico. Since their own consumption levels are high, they have no or limited capacity to export. Instead, many of these nations are net oil importers despite high production. This makes them ineffective participants in oil price determination process. Riding high on the shale oil and shale gas discovery, the non-OPEC oil producers enjoyed increased production and larger market share in recent times. However, shale oil technology needs high upfront investments which soon marred the shale oil producers. (For more, see: The World's Top Oil Producers.)
The following IEA graph indicates the high production levels achieved by non-OPEC nations in recent times while riding high on the shale oil
. However, none of that seems to have translated to create a visible price impact (like in the case of Saudi Arabia represented above). High production levels during 2002 – 2004 and in 2010 did not result in price declines, and were instead accompanied by raised prices. The recent high production during 2014 – 2015 is accompanied by price declines, but it overlaps with and can be equally attributed to the increased supply from OPEC.
This indicates that non-OPEC oil producers have a limited role to play in the oil price determination process, and it is OPEC (primarily Saudi Arabia) which calls the shots. (For more, see: Top OPEC Competitors and How OPEC Controls Them.)
The Bottom Line
The dynamics of oil economy are complex, and the oil price determination process goes beyond the simple market rules of demand and supply. It also has generous components of geopolitical developments and economic interests included. Despite occasional challenges such as fracking technology and oil discovery in non-OPEC regions, OPEC continues to maintain its upper hand in the oil price determination.