Oil prices and OPEC influence

Light, sweet crude is the most desirable grade of crude oil because it requires minimal refining while producing the most gasoline. This chart is useful when considering geopolitical risk and commodities prices, as it illustrates where the “best” oil is.

Oil types by country (click image to view full-sized)

The chart was produced by the U.S. Department of Energy in 2012. Perhaps that is why West Texas Intermediate (WTI) crude is not listed, as the U.S. was not an oil exporting nation until recently, under President Obama’s administration, although we are not a net oil exporter.

OPEC

The Organization of Petroleum Exporting Countries has had varying levels of power since its founding in 1960 and heyday in the 1970s. Saudi Arabia has always been the controlling producer in the cartel. OPEC’s objective is to control oil price by either freezing production or cutting production.

Iran is an OPEC member. Due to the U.S.-Iran nuclear deal, finalized in 2015 and effective as of early 2016, sanctions on Iranian products and services have been lifted. This includes Iran’s heavy, sulfurous crude oil. Unfortunately for Iran, crude oil won’t be quite the source of hard currency revenue that it might have been in the past. Saudi Arabia will freeze production at January 2016 levels, with other OPEC members expected to fall in line:

Not surprisingly, Iran is unwilling to play ball, with oil minister Bijan Zanganeh last week saying it was “a joke” that countries pumping more than 10 million b/d should expect Iran to freeze its production at the low level imposed by the sanctions.

OPEC’s ability to control market prices has been diminished by the presence of U.S. shale oil producers as an additional global supply source. This was not an OPEC concern until U.S. shale production increased for U.S. domestic use (lessening dependence on foreign oil) and even some limited exports. OPEC is likely to stick to its resolve to freeze but not cut production, as Riyadh could survive $20/barrel oil according to Platts.

Cheap oil trends

Given prominent policy-maker concern about anthropogenic climate change and reducing dependence on fossil fuels, it is odd that the U.S. government would decide to allow greater levels of extraction (e.g. from strategic reserves) as well as building out infrastructure for more production now, for the first time in 40 years. Increased supplies make gasoline less, not more, expensive, thus encouraging greater use.

The plummeting price of oil has had unsurprising consequences: SUVs and other fuel-inefficient vehicles have surged in popularity. Hybrids are being put up for sale. There is a possible impact on high-end exotic electric vehicles such as those manufactured by Tesla. (Since Tesla vehicle owners are motivated by factors other than cost of acquisition or use, the effect of lower gasoline prices is unknown.)

For reasons unclear to me, 91 octane grade fuel is dying off.

Many stations are eliminating premium gasoline. That also means 89 octane is gone at those stations, too, because you can’t have the 89 without the 93. At most fuel pumps, 87 and 93 are mixed just seconds before they reach your car to make 89.

Unavailability of higher-grade fuel will cause problems for the many new vehicles which require it for optimal performance.

Texas almost joined OPEC

The Texas state organization most responsible for bringing crude oil to market as refined gasoline was the Texas Railroad Commission. It was created in 1891 and empowered to restrict production to avoid waste, but its role expanded over time. The Commission set global oil prices until it was dethroned by OPEC in 1973.

OPEC’s influence was waning by the 1980s. In 1988, a member of the Commission decided that Texas had some common objectives with OPEC. The commissioner went to Vienna to discuss cutting Texas oil production, in order to raise prices and avoid financial waste, if not to express solidarity with OPEC members. His actions were viewed with skepticism, or worse, by many.

Texas Oil Official Takes His Pitch To OPEC (April 28, 1988):

With daily production of about 2 million barrels, Texas pumps more oil than all but eight nations and often sees itself more in league with exporters such as Saudi Arabia and other OPEC members than with net consumers such as Illinois and most other states.

Texas didn’t join OPEC.