The premise behind the OPEC oil monopoly is a simple one. Developed nations need oil to fuel their economies, so the oil-producing members of OPEC collude to restrict output in order to drive oil prices up. For decades that relationship held up well, with OPEC restricting production to raise prices and increasing production to lower prices. But lately markets haven’t been reacting to OPEC’s production cuts the way they used to. Despite continued cuts from OPEC, oil prices continue to slide. Does that spell the end for OPEC, or is it just an indicator that the economy is entering a period of weakness?
As with many questions like this, the answer could be a little bit of both. With OPEC member Venezuela experiencing severe difficulty in producing oil due to its hyperinflationary crisis, and with Iran being the subject of US sanctions, OPEC’s production is largely dominated by Saudi Arabia. With Russia being one of the world’s top producers of oil too, the relationship between Saudia Arabia and Russia is becoming more important to world oil markets than OPEC alone. And with the US now the world’s largest oil producer, that adds another element that continues to dilute OPEC’s influence.
But on the other hand there’s no denying that there’s an economic influence at play here too. Oil prices being down while production is also declining is an indicator of decreasing consumer and industrial demand, meaning that the economy is slowing down. That’s borne out by data from the US showing a decline in oil refining too. In fact, oil refining is at about its lowest level since the financial crisis.
That’s a warning sign that we’re probably at the leading edge of the recession already. While some of the high-flying numbers like stock market indices remain strong, and unemployment numbers remain low, there is severe turbulence underneath all that bullishness. It’s only a matter of time before that becomes more apparent to more people, and oil markets may be leading the way in demonstrating that.