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OPEC: Counter Hegemon Or Lame Duck

How many of you remember the imperious personality of Sheikh Yamani ? The suave Saudi Minister of Oil and powerful OPEC delegate for 25 years. There was a time when the whole world held their breath every time OPEC met. The meetings in Vienna became such a global media spectacle that the infamous Carlos the Jackal took the OPEC ministers hostage in 1975 to further his dubious cause.

The world has indeed changed. Even though Saudi Arabia is still an oil powerhouse and the Straits of Hormuz still have strategic value, the emergence of powerful non-OPEC oil producers and the collapse of the OPEC administered pricing system in 1986 ushered in a new era in oil pricing. The nail in the coffin for OPEC was the United States's Strategic Petroleum Reserve and the US energy self sufficiency doctrine that has emerged. This led the US to invest heavily in the technology to produce shale oil and alternative energy sources. The notion of Peak Oil, so popular just a few years ago has been banished to the scrap heap.

The real challenge for OPEC is not setting oil ceilings and controlling prices. That power shifted from multinational oil companies in 1950s and 1960s and OPEC from 1973 to 1986 to the so called market. However, the international market for trading oil is a fragmented beast that involves many diverse private and public entities. This includes investment banks, hedge funds and retail investors, including private investors and high net worth individuals.

The futures markets attracts a wide range of financial players (pension funds, hedge funds, index investors, technical traders, & retail investors). Concerns that these financial players & their trading strategies could move the oil price away from the true underlying fundamentals has alarmed many governments and regulatory authorities.

With large private oil companies and national oil companies virtually powerless to control oil prices and a world that can function with relatively high prices the OPEC countries have been happy to sit on the massive windfall and the enormous budget surpluses that have resulted in Middle Eastern sovereign funds buying whole neighborhoods in London and Paris.

In short OPEC fell from its lofty position, as the only developing world entity that could stand up to the hegemonic power of globalization, to an embarrassing quango with very little teeth and firmly in the pocket of what we loosely term the market.

Even within the elite club the grand vision of the Shah of Iran in the 70s and the war mongering Saddam in the 80s have been replaced with dithering leaders and a dilapidated and fragmented oil complex that is in need of new technology and fully dependent on Western companies to function. Iran is the only country that has tried to run its oil industry without too much outside influence. But this has led it to halve its export capacity and practically eliminate any influence it had in OPEC.

Will this scenario change ? The simple answer is no. Running a Middle Eastern country is a difficult job, with very little job security. Qadaffi, Assad, the Shah of Iran, and Saddam Hussein can vouch for this. Middle Eastern leaders know the oil price will not stay this high forever. One day there will be too many Teslas to warrant a 110 dollar oil price. At that stage the status quo will remain in perpetuity and the Middle East will again become the forgotten route between East and West, the Silk Road.