Summary

OPEC+, a coalition of OPEC and non-OPEC oil producing and exporting members was formed in 2016 to address issues pertaining to oil market instability as well as consolidate geopolitical leverage of its members on account of falling oil prices and competition by the US shale boom. OPEC+ policies has had significant implications for oil importing developing countries such as India and China as well as other producer states such as the United States.

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organisation established in 1960 by Saudi Arabia, Iran, Venezuela, Kuwait and Iraq. Currently, it has 13 members, viz. Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates and Venezuela. The objective of the organisation is to coordinate policies with respect to petroleum demand and supply to ensure fair and stable prices and ensure a steady income to oil producing countries.1  

The coalition called the OPEC+ was formed in 2016 when several non-OPEC oil exporting countries joined hands with OPEC to maintain stability in the oil market. On 23 September 2016, OPEC countries adopted the landmark ‘Algiers Accord’. One of key decisions taken was the establishment of a high-level committee for dialogue and discourse between OPEC and other oil producing countries. This led to the signing of the ‘Vienna Agreement’ in November 2016 and the ‘Declaration of Cooperation’ (DoC) between OPEC and other major oil exporting countries in December 2016.2

Since then, OPEC+ has regularly held meetings to discuss output levels, and the global economic and oil market outlook. OPEC+ has 23 members, made up of 10 major oil producing countries (Russia, Kazakhstan, Azerbaijan, Brunei, Bahrain, Mexico, Oman, South Sudan, Sudan and Malaysia), along with the 13 OPEC members.3

The US overtook Saudi Arabia as the world’s leading oil exporter post 2014,4 thereby challenging Saudi Arabia’s status as the dominant oil producing country as well as the global swing supplier. The shale oil revolution benefitted US oil and gas companies. In 2016, tight oil (also known as shale oil) production increased from less than 0.5mb/d to 4.3mb/d in 2015.5 With US oil coming into the market amidst weak demand, oil prices exhibited a downward trend from 2014 to 2016.6

The entry of US oil into the market allowed oil importing countries to diversify their trade partners and enabled them to negotiate lower prices. This raised concerns among the OPEC members which served as a key reason for the OPEC and the non-OPEC oil producers to join hands together to form the OPEC+. Between 2017 and early 2020, global crude prices peaked around US$ 80 per barrel as compared to the US$ 30 per barrel in 2016.7

How does OPEC+ function?

OPEC+ allots a quota to each of its member countries depending on oil reserves and production capabilities. It seeks to maintain high oil prices as well as manage the successful functioning of the group as a cartel. The effect of OPEC+ policies and their relationship with real oil prices is a combination of factors including stocks, quotas and the degree to which OPEC members surpass their respective production quotas.8

OPEC alone controls about 35 per cent of the global oil supply. Collectively OPEC+ controls approximately more than 45 per cent of the world oil supply.9 The leverage of each country depends upon the market share of that country within OPEC+. Greater the market share, greater the leverage. Saudi Arabia and Russia are two of the most influential countries within OPEC+ due to their high market share.

Saudi Arabia is seen as the de facto leader of OPEC and OPEC+. Due to its unique position, Saudi Arabia has gained the reputation of the global ‘swing supplier’, i.e., it can ramp up production when demand is rising and curtail output when the market is in glut to mitigate oil price volatility.10 The burden of production cuts is usually shared by bigger producers of OPEC+ such as Saudi Arabia, Russia, Kuwait and the UAE. Many of the OPEC+ countries have substantial spare capacity, due to which they can produce oil at even low prices. In order to maintain oil market stability, OPEC+ members actively pursue policies that consolidate their market share as well as maximise economic gains.

OPEC+ Strategy in Times of Crisis

In December 2016, the first OPEC and non-OPEC Ministerial Meeting took place where the members agreed to cut production by 1.2 million barrels per day.11 This led to rise in crude prices. OPEC+ has continued to re-balance the market with adjustments to oil production quotas. During the COVID-19 pandemic, due to drastic fall in demand for oil on account of global lockdowns and decreased economic activity, OPEC basket price fell from US$ 64 per barrel to US$ 41 per barrel. The benchmark price for United States crude oil, the West Texas Intermediate, briefly went negative for the first time in history.12

OPEC+ members strategised a comprehensive plan to counter the demand shock. In April 2020, the members made the biggest production cut of 9.7mb/d till June 2020, which was revised to 7.7mb/d till December 2020 and finally a revised production cut of 5.8mb/d till April 2022.13 Countries such as Canada and Norway also revised their production as well.14 OPEC+ adopted a proactive approach subsequently as well. In 2021, with improving macroeconomic sentiment due to the reopening of several major economies, OPEC+ proceeded to increase production in a phased manner.

OPEC+ is also playing a major role in balancing the oil market during the Russia–Ukraine war. Russia is one of the major oil producing countries of OPEC+.  Due to various factors such as limited excess capacity, severe supply disruptions, underinvestment in the oil sector and rising uncertainties regarding global macroeconomic sentiment, OPEC+ decided to make another production cut at the 33rd OPEC+ Ministerial Meeting on 5 October 2022. The initial production cuts by OPEC+ can be seen as a measure to drive up the prices thereby inflating Russia’s revenue to prolong the war. Such speculations raised concerns regarding the efficacy of OPEC+ in ensuring a stable oil market, given the vested interests of individual members of the organisation. 

Implications of OPEC+ Policies

The US overtaking Saudi Arabia as the lead exporter of oil post 2014 ignited a debate regarding US’ interests in the Gulf, given that it could give US foreign policy in the Middle East more flexibility as it will no longer be driven by oil interests.15 The influx of US oil in the market also heightened the competition for a higher market share, which also led oil prices to an all-time low.

Due to these factors, Saudi Arabia, the de facto leader of OPEC, opted for a strategy of diversifying its partnership with other oil producing countries such as Russia to gain control of the market, consolidate its geopolitical leverage and capture market share. Over the years, the US–Saudi relationship has seen many roadblocks which has prompted the US to re-assess its relationship with the Kingdom. This also indicates that OPEC is looking for a wider playing field, beyond traditional partnerships for higher economic gains. It can also be said that Russia and Saudi Arabia work in tandem to compete with the US shale industries, which has in recent years captured a substantial market share.

OPEC+ policies also have a significant impact on the oil importing countries. The entry of US oil into the market and the competitive environment that granted oil importing countries with substantial bargaining power, waned with the creation of OPEC+. The impact on the oil importing developing countries is much more prominent as they are some of the largest importers of oil. India and China are two of the largest oil importing developing countries.16 When the first US shipment of oil landed in India in October 2017, it was hailed as a landmark event.17

After the creation of OPEC+, oil prices started following an upward trend. This has put the consumer states, i.e., the oil importing states, at a disadvantage. Their negotiating power with respect to oil prices has waned with the ‘cartelisation’ of the non-OPEC oil producing members as well. Analysts note that as OPEC+ producers largely target high oil prices, it can worsen inflation, widen the current account deficit and depress economic activity in the net oil importing countries.18 These implications are more significant for oil importing developing countries than developed countries as many of the developed countries especially in the European Union have accelerated the process of energy transition in order to reduce their dependence on crude imports.

Cooperation within OPEC+ has also faced many challenges as well. There have been many instances of standoff/disagreements within OPEC+, some with prominent geopolitical repercussions. One such instance is the Russia–Saudi Arabia price war. In March 2020, OPEC+ members decided to make a production cut of 1.5mb/d until June 2020. Russia refused to make the production cut and announced withdrawal from the earlier production cut decisions. The Kingdom of Saudi Arabia responded to Russia’s decision by “offering discounts on its oil and announcing an increase in oil production to the maximum level”.19 This led the oil prices to tumble to as low as US$ 30/barrel.20 The impasse eventually broke in April 2020 due to falling demand and falling prices which necessitated cooperation between the oil producing countries to ensure stable prices.

Members have also withdrawn from the organisation due to various reasons after the creation of OPEC+. Indonesia, for instance, withdrew its membership from OPEC+ in 2016, expressing dissent over the organisation’s production cut requirements.21 Qatar also withdrew its membership from OPEC+ in 2018, on account of the Saudi-led blockade.

On various occasions, Iraq and the UAE have also faced a standoff with Saudi Arabia on matters pertaining to production quotas. The countries having a smaller market share as compared to the bigger OPEC+ producers like Saudi Arabia and Russia, tend to overproduce beyond their allocated production quotas to boost revenues. Such disagreements within OPEC+ temporarily impact oil prices, usually putting upward pressure on them, but soon get resolved. The takeaway is the certain degree of insecurity among the smaller oil producers as compared to bigger, more influential oil producers such as Saudi Arabia and Russia.

Despite occasional issues, the establishment of the DoC framework and the OPEC+ is considered a landmark development as it has accelerated oil price recovery, benefitted the oil producing and exporting countries and resulted in higher levels of compliance with oil production quotas.22

Conclusion

The creation of OPEC+ was an important decision for OPEC members to sustain high inflow of oil revenue to bolster their economies. It has had several political and economic implications for oil exporting as well as importing countries. OPEC+ has proactively taken steps to manage oil supply and demand during periods of crisis like the COVID-19 pandemic as well as during the Russia–Ukraine war.

Several countries such as the United Kingdom, France, Sweden, Norway, and Denmark have embarked on robust energy transition programmes. Many of the oil exporting Arab countries such as Saudi Arabia, UAE, and Kuwait have also initiated plans to diversify their economies to reduce dependence on oil revenue. The viability of these economic programmes is also contingent upon a higher revenue guaranteed by higher oil prices. Given the above, it remains to be seen if OPEC+ can continue to calibrate its policies in a rapidly evolving domestic and global energy security situation for the benefit of its members.

Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrrikar IDSA or of the Government of India.

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