OPEC has been weakened more than anyone could have imagined just a few months ago by the military actions of U.S. president Donald Trump in Venezuela and Iran. White House may see this as a big win, but ultimately it could hurt both the U.S. energy markets and the U.S. Saudi Arabia has been the de facto leader of the Organization of Petroleum Exporting Countries (OPEC) for decades. It has used its influence to manipulate oil prices and defend market share by adjusting output.

This influence has been eroding for decades as the U.S. - and other non OPEC members - have become more prominent in recent years. OPEC's share of global oil production has fallen from a high of 50% in 1970s to 35% in 2012, and to 26% last March after the Strait of Hormuz was closed at the beginning of the Iran War. United Arab Emirates (UAE), the cartel's 4th largest producer, left the group after 60 years in order to pursue their energy strategy without OPEC production quotas. This directly challenged Saudi Arabia and its Gulf neighbors. Trump, a longtime critic of OPEC, hailed the UAE’s departure as “great,” arguing that it would help lower oil prices.

It may be true, and the U.S. President's aggressive foreign policy could ultimately prove to be the demise of the producer group. A weaker OPEC may not be good for producers or consumers, including the U.S.

Long-time rival OPEC is a lightning rod of ire for the United States. It is accused by lawmakers of being a cartel. Trump has been scathingly critical of the group for many years. In 2018, he said that OPEC was a monopoly which kept oil prices artificially high. After returning to the White House last year, he increased pressure on OPEC to keep prices low.

He went beyond the tough talk this year. In January, the U.S. launched a lightning-fast raid on Venezuela that saw President Nicolas Maduro, who had been in power for many years now captured and replaced with a Washington-friendly regime. The Trump administration quickly took control of Venezuela’s oil sector. It redirected most of Venezuela’s exports to the U.S., and opened the vast oil reserves of the country to Western companies. Venezuela, a founding member of OPEC in 1960, has seen its production fall to less than 1 million barrels a day over the past decades due to mismanagement, chronic low-investment, and U.S. sanction. This is less than 1 percent of the global supply. The output should now rebound, as new capital flows are expected. Trump may not have objected to Venezuela staying in OPEC but it's hard to imagine Caracas agreeing with OPEC quotas, given Washington's tight control over its energy sector.

MIDDLE - EAST SCRAMBLED U.S. and Israeli strikes on Iran in February triggered a much more dramatic cascade that left OPEC fragmented and largely helpless.

Within hours of the initial strikes, Tehran sealed off the Strait of Hormuz and trapped a fifth of world oil and gas reserves in the Gulf.

During the 40 day active conflict, dozens energy facilities across the Gulf were targeted, including oil and gas fields and refineries, pipelines, and storage terminals. Saudi Arabia and UAE diverted some of their output outside the Gulf to avoid the closures and fighting. Washington imposed its own blockade in mid-April, while U.S. attempts to break the Iranian oil blockade are not helping to restore traffic on the narrow waterway. Saudi Arabia, Kuwait, the UAE and Iraq, OPEC's traditional pillars, were left without their main export route and operating flexibility. They were, in short, utterly powerless to deal with the largest oil shock ever. The U.S. Oil and Gas Industry -?now ranked as the largest producer in the world - was able to quickly ramp up its exports to Asia, Europe and other parts of the world, further eroding OPEC’s influence and market share. The U.S. Oil Industry is largely driven by the market, not America. The U.S. oil industry does not have the same spare capacity as OPEC to balance the market.

Trump could find that this new world is more difficult to manage than he expected.

CUSHIONING BLOWS OPEC's role in stabilising the oil market has been a key one for many years. It uses large quantities of spare capacity at low cost, mainly in the Gulf region, to absorb the blow of weather and wars. The OPEC strategy has also been effective during times of excess supply, such as the COVID-19 epidemic. In April 2020, Trump personally asked Saudi Crown Prince Mohammed Bin Salman to reduce output and relieve pressure on U.S. oil producers. OPEC+ announced the largest production cut ever within days.

Oil markets will be more volatile and less resilient to disruptions if OPEC does not manage the market effectively. This would translate to more frequent boom and bust cycles for producing nations like the U.S. and higher operating costs for the oil companies.

The Shadow of its Former Self

It's premature to declare OPEC as dead. Riyadh is almost certain to try to stabilize the group over the next few months, and will rely more on its alliance with Russia in order to reassert its authority.

The Iran war has left OPEC politically in ruins. Iran's bombing of Saudi Arabian energy infrastructure and its decision to shut down Hormuz – a move that was once unthinkable – has caused deep rifts in the group. It may take many years for them to heal. Sunday's OPEC+, which included Russia, was notable not for the announcement of a hypothetical quota hike. The UAE was absent.

OPEC as we have known it for decades is no more. Trump and others will regret this.

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(source: Reuters)