HAS THERE ACTUALLY BEEN A CARTEL?

Despite numerous statements by analysts that OPEC effectively committed "suicide" after its latest meeting and completely lost influence over oil prices, it was the ill-fated decision by the cartel to "float" output levels that caused a record-breaking collapse in prices at international stock exchanges. Having crossed the red line of 40 dollars per barrel, oil prices felt to record-low levels that had not been seen since 2009.

That is to say, OPEC admitted its powerlessness to change the situation on the market in any way and effectively continued successfully to influence the price, albeit in a negative way. According to the same analysts, another thing is that this state of affairs actually harms primarily the economies of members of this organization, which are for the most part dependent on oil revenues. But even the danger of a serious reduction in domestic government spending is apparently not capable of pushing key actors within the cartel towards taking an effectual decision to reduce output.

"The OPEC meeting was a bit of a disaster" - this short conclusion by a Western expert is a fairly clear description of the confusion and chaos that came to reign the oil market after the meeting.

What did OPEC do? In fact, it only confirmed the right of the countries to produce as much oil as they want to. Despite the initial factoid released by Bloomberg, this does not mean an officially declared increase in output. However, the actual level of OPEC output has for many months been exceeding the declared 30m barrels per day by at least 1.5m. On the whole, such a decision would have been logical, given the admission of Indonesia into the cartel, which would have resulted in aggregate output immediately rising by 900,000 barrels per day. But a statement released following the 4 December meeting said that the cartel's aggregate output did not include Jakarta.

As already said, the decision cost the market quite "dear", and for the first time there was talk that we were in for a repeat of what happened in 1997-98, when a barrel of oil sold for even below 10 dollars. Leading oil producing countries are now quite seriously preparing for a possible decline in oil prices to 20 dollars, taking into account the fact that Iran will be fully coming back to the market in the near future. "We cannot put a number now. We don't know when Iran will come," OPEC Secretary-General Abdullah al-Badri said after the meeting of the organization. We should note that Iran is going to bring back to the market almost 500,000 barrels per day at once. Afterwards, according to officials, its output will grow by another million barrels.

According to analysts who commented on the cartel's latest moves, the frank admission by the organization of its powerlessness in the face of the market hammered the last nail in OPEC's coffin. "OPEC effectively no longer exists, because what is the value of an organization that set itself the sole task of adjusting volumes of oil production and is not fulfilling that task," said, in particular, Stephan Heibel, an independent stock exchange analyst.

Furthermore, there is now even the question of whether OPEC is actually a cartel or a political club where each country promotes decisions that are advantageous for itself? "If OPEC was a cartel, it would require its new members to produce less oil - or, at least, to increase production in a slower manner. However, it does not require that - and new members themselves do not do that," a Western expert said.

In addition, members of the organization, as a minimum, ought to have kept output within established boundaries. Instead, they violated those boundaries in 96 per cent of cases, and this eventually forced OPEC in 2012 to completely abandon country-specific output levels. Finally, cartel members ought to have, with other things being equal, at least not increased oil output - after all, this is their key tool to increase prices. However, they are still acting differently again.

According to analysts, the myth about OPEC being a cartel continues to exist simply because this is advantageous for the organization itself, but in reality it has long turned into a political club. This explains the decision by the organization to re-admit Indonesia, which was expelled in 2009 because oil consumption in that country is almost equal to the level of production there and it is effectively wrong to call it a big exporter. Therefore, it a priori does not need high oil prices. But it does need access to OPEC meetings in order to establish beneficial contacts with oil companies from the Persian Gulf. For OPEC, the admission of Indonesia only makes sense with long-term prospects. For example, it is believed that it is almost not possible anymore to expand production in many OPEC countries, and even if it is possible, it is rather expensive.

On the other hand, OPEC needs new markets, and Indonesia needs to attract foreign investment. In this given case, the cartel just let them all know that the Indonesian market was an OPEC market, therefore it is OPEC member countries that would have a presence there.

If OPEC was really able to control markets, the economies of its members would not be suffering from the lack of money that much. Even Saudi Arabia itself, despite its huge financial reserves, has started thinking about a new economic po-licy aiming to lower domestic fuel subsidies (which cost this country dear) and issuing new government bonds to cover its budget deficit. Sounding the alarm more than everyone else are Venezuela, Libya, Algeria and Angola, which have repeatedly stated the need to reduce output to push oil prices up, because this is the only thing that will help their troubled economies.

However, according to analysts, a speedy stabilization in prices in the market cannot be expected because of Saudi Arabia's "efforts". "The price will be falling until we see a wave of bankruptcies in companies that extract shale oil in the United States," says an independent stock exchange analyst, Stephan Heibel. Eugen Weinberg, who heads the analytical department on commodity markets at Commerzbank, believes that Saudi Arabia and a huge number of analysts have underestimated the ability of those companies to adapt to a period of low prices. "They have managed to raise the productivity of one drilling to almost 0.5m barrels and to improve the profitability of wells. Nobody expected that with prices being 40 dollars, the production of shale oil would almost not fall," Weinberg said.

On the other hand, OPEC members insist that other extractive countries that are not members of the cartel should also reduce oil production. "We cannot cut production alone," The Wall Street Journal quoted an OPEC member as saying. "Other countries should also contribute to that."

With regard to the uncertainty around Iran coming to the market, the Islamic Republic is in this case one of the countries whose economy is being particularly negatively impacted by the decline in prices. Iran is therefore clearly not happy with OPEC's decision, because, according to analysts' estimates, to maintain budget balance it needs the price to be at least 120-140 dollars per barrel. Nevertheless, it is natural that this country will not agree to significantly reduce production either today or in the future, when the market opens its oil "doors" to it.

So, according to the majority of analysts, OPEC will apparently continue its strategy, which does not inspire hope that there will finally be an upward trend in prices. This will continue until the moment Saudi Arabia and OPEC members that back it achieve the desired effect on at least one of the above points. That is to say, OPEC effectively has voluntarily abandoned its key role - maintaining beneficial oil prices in the market - in favour of the interests of influential member states.

However, if we believe in the cyclical nature of historical development, then at present, in the same way as in 1998, the oil industry should emerge from the crisis renewed, like the mythical bird phoenix does, and even stronger, experts say.

Back then, oil prices approached the level of 150 dollars per barrel. This figure is almost a chimera at present. Albeit, miracles do happen there where you believe in them...

OUR NOTE

The Organization of Petrol Exporting Countries first earned a reputation as a cartel in 1973, after it introduced an oil embargo in response to support provided by the West to Israel during the Arab-Israeli war. Its sanctions pushed international oil prices up four-fold, and the United States suffered even more. However, even back then, the aim was actually not so much to restrict output but to conduct joint measures to remove the oil sector from under the control of Western companies.