For the second time in two weeks, Europe will host a meeting of a controversial international organization whose decisions are closely followed by citizens globally. But, in a telling sign of the world’s fundamentally changed economic structure, the gathering of FIFA leaders last week will arguably have a greater impact on the world than the meeting of OPEC leaders on June 5.
OPEC summits used to be dramatic events – just the anticipation of production cuts or policy shifts would often rattle the global oil price. In contrast, the big result from last fall’s summit was…nothing. The organization abstained from taking action, despite the cascading oil price. A very similar result is expected at this week’s meeting.
However, as OPEC’s influence on the oil price declines, the influence of highly unpredictable geopolitical events grows. It is for this reason that the real drama surrounding the OPEC summit is unfolding outside the meeting room. Security is unraveling in the Gulf region, and there will likely be significant impacts on the oil price -- at least in the short term.
Yemen, which borders Saudi Arabia and is situated on the Gulf of Aden, is a current focus of the Gulf conflict and the site of a proxy war between Saudi Arabia and Iran. Any escalation of this battle will likely obstruct the major oil transit route between the Gulf and Europe.
With anticipation that a larger portion of its oil will be returning to market soon, Iran has both economic and geopolitical interests in moving the confrontation to Saudi Arabia itself. Whether through terrorism carried out by Iran’s Houthi surrogates or other means, an attack on major Saudi oil production, transit infrastructure or government center would lead to a significant increase in the oil price. Such an attack could also deter Saudi Arabia from continuing its fight in Yemen, achieving two Iranian goals at once.
The Saudi domestic arena is already at risk. Last week, Saudi Arabia experienced one of the worst terror incidents in its recent history – an attack on the Imam Ali Shiite Mosque in the Kingdom’s Eastern Province killed more than two dozen people and injured over 100 others. As the possibility of additional attacks grows, the ability of the new leadership in the Kingdom to cope with these challenges adds an additional risk factor to oil prices.
In parallel, the conflict in neighboring Iraq has also escalated, leading most recently to the fall of Ramadi to the Islamic State. While these events have not yet affected oil production and export capacity, the fragile situation may change quickly.
With non-OPEC countries, led by the United States, now producing over 60 percent of the global oil supply, the oil cartel’s inability to change the trend of the global oil price is the new normal. But Saudi Arabia and the neighboring Gulf states remain the globe’s major oil producing region. Continued instability there will be significant.
The extent to which it affects the oil price is largely dependent on the state of the global market. If the oil market is liquid – with supply and demand far apart – geopolitical events will likely have little impact on the oil price. But if supply and demand are close, events that cause even the slightest reductions in oil supply will generate a spike in prices. Under either market condition, there could be meaningful price swings in the event of a dramatic geopolitical event – such as a major terrorist attack on Saudi Arabia’s oil infrastructure – that affects significant volumes of supply or that interferes with important transit routes.
The decline in OPEC’s power to affect oil market trends is the new normal, and it has many geopolitical and economic advantages in the U.S. and beyond. However, OPEC’s demise also adds an additional element of volatility – as disruptive events occur, there is no single body, country or leader that can take
action to counter the effects. With oil prices untethered to any formal structure, we also have to be prepared for a new normal of far more dynamic and unpredictable price trends.
Brenda Shaffer is a professor with the Center for Eurasian, Russian and East European Studies at Georgetown and a fellow with the Atlantic Council’s Global Energy Center.