The Limitations of OPEC

The Organization of Petroleum Exporting Countries (OPEC) is reputed to be a powerful force in world energy markets, and recently Russia has conspired with OPEC to raise energy prices. The OPEC cartel, led by Saudi Arabia, tried to exploit its monopoly power in 2023 by reducing production. It enjoyed temporary success as its revenue increased from selling a lower quantity of oil at a higher price. However, non-OPEC competitors reacted to the new profit opportunity with such a vigorous supply response that the costs of crude oil and energy substitutes were lower at the end of 2023 than at the beginning of the year. Competition dominated monopoly.

The additional production and energy exports occurred despite new barriers to global shipping. China restricted shipping in the Pacific Ocean, the Russo-Ukrainian War interfered with shipping in the Black Sea, and Houthi rebels threatened shipping in the Red Sea. Increased maritime insurance rates resulted from rebel actions and forced some shippers to switch to the longer and more costly route around Africa.

Additional barriers to trade included U.S. environmentalists lobbying to limit U.S. exports of fossil fuels. On January 26, President Biden announced a pause in approvals for new LNG exports. In addition, Russian exports of natural gas fell with the sabotage of Nord Stream 1 and 2.

However, these new barriers to global energy supplies were not insurmountable. American suppliers found it profitable to produce and export record volumes of crude oil. New and expanded terminals for liquefied natural gas (LNG) contributed to record exports of U.S. LNG. Other non-OPEC suppliers also increased energy exports, adding to the abundance of energy products. Prices of crude oil, LNG, and products, such as gasoline, at the end of 2023 were all lower than a year earlier.

In 2023, competition dominated monopoly. Whether this dominance continues remains to be seen, but it would be helpful if European allies provided more assistance in restraining Houthi rebels. Europe is harmed much more than the U.S. by forcing ships to spend an additional 2 weeks traveling around Africa rather than using the Red Sea and the Suez Canal.

Thomas J. Grennes is a Research Fellow at the Independent Institute and a Professor of Economics and Agricultural and Resource Economics Emeritus at North Carolina State University. He was also a member of the founding faculty at the Stockholm School of Economics-Riga, in Riga, Latvia.
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