Like that of Yasser Arafat, OPEC's obituary has been written many times. But as the recession deepened last fall, the cartel's weaknesses became painfully apparent. Oil demand levelled off, and crude prices fell from over $25 (U.S.) per barrel before Sept.11 to below $20 by December.
More importantly, OPEC and, in particular, "swing" producer Saudi Arabia no longer export enough oil to control prices. OPEC still produces about 40% of the world's oil, but it now accounts for just half of worldwide exports, versus three-quarters in the late 1970s.
OPEC's price discipline is again breaking down. In addition to trying to keep 11 member countries in line, it wants non-member nations to limit output. In December, Russia, Mexico and Norway agreed to cut production by 400,000 barrels a day, and OPEC promised a 1.5-million barrel/day cut. As a result, Russia surpassed Saudi Arabia in oil production in January. Yet Russia is still well below its peak of more than 11 million barrels a day, set before the collapse of the Soviet Union in 1989.
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Larry Goldstein, president of the Petroleum Industry Research Foundation in New York, says OPEC will struggle to defend the low end of its target price range of $22 to $28. "It's not what they can promise, it's what they can threaten," he says. In the old days, the Saudis could boost output and cause chaos. Today, that would just lower prices for everyone.
There is also the usual jockeying for quotas within OPEC. Iraq, with UN sanctions now eased, produces more than two million barrels a day. This is the problem with cartels: Everyone wants everyone else to cut back to raise prices, but they resist doing it themselves.