July 28, 2023
by Haley Zaremba

The Uncertain Future Of The OPEC+ Alliance

• OPEC+ recorded their highest revenues since 2013 at $888 billion in 2022, however, once accounting for inflation, the prices are down nearly a fifth compared to 2014.

• Saudi Arabia, OPEC's de facto leader, has pushed for production cuts to keep oil prices high, but it has led to the International Monetary Fund downgrading Saudi Arabia's growth projection from 3.2% to just 1.9%.

• The burden of production cuts isn't equally shared, with Russia seen as benefitting from Saudi Arabia's cuts, which could result in Russia overtaking Saudi Arabia as the largest oil producer in OPEC+.

For OPEC, it is the best of times and the worst of times – depending on which member you ask. Despite a massive oil price windfall brought on by Russia’s war in Ukraine last year, the OPEC members are reaping massively unequal revenues from a shrinking basket. In fact, the alliance is under extreme stress due to waning oil demand and a lack of coordination among the members, and some experts believe that OPEC+ is in danger of breaking up in the near term.

By some metrics, 2022 was a banner year for OPEC+. Nominal revenues were at their highest mark since 2013, coming in at $888 billion for 2022 according to figures from the Energy Information Administration (EIA), a whopping 54% from 2021 levels and just slightly higher than 2014’s total, after which oil prices began their long decline. However, the real figures are not as rosy. Once inflation is accounted for, prices are actually down nearly a fifth compared to 2014. The rise from last year, however, is still considerable at 43%.
While OPEC’s revenues seem to be on a significant upward trend post-pandemic thanks to high oil prices, the actual number of barrels being sold is still worryingly low. “While the amount increased last year, it remained below pre-pandemic levels and among the lowest of any year so far this century,” Bloomberg reported earlier this month. “Indeed, taking all factors into account, 2022’s real per capita export revenue is less than in 2009, when global GDP shrank and nominal oil prices were almost 40% lower.”

OPEC is understandably nervous. On the heels of last year’s wartime windfall, Saudi Arabia – the cartel’s de facto leader – has pushed for steep production cuts in order to keep oil prices high. But a further decline in the quantity of barrels produced and sold has backfired for the Saudi government. Just this week, the International Monetary Fund (IMF) downgraded Saudi Arabia’s growth projection from 3.2 percent to just 1.9 percent, pointing to “production cuts announced in April and June in line with an agreement through OPEC+” as a driving factor for the revised outlook. The decrease is a complete u-turn for Saudi Arabia, which was the fastest-growing economy in the G20 in 2022.

But the burden of production cuts – and the resulting economic hit – is not being borne equally by OPEC+ members. “Russia has been pretty much cheating and free-riding off of Saudi Arabia’s cuts,” Greg Priddy, a consultant at Spout Run Advisory and senior fellow at the Center for the National Interest in Washington, DC, told the Middle East Eye earlier this month. In fact, the International Energy Agency (IEA) has reported that Saudi Arabia is on track to lose its spot as the largest oil producer in Opec+, as the nation is due to be overtaken by Russia.

But the unfortunate truth is that OPEC needs Russia in order to maintain its ability to control oil prices. “An increasing number of OPEC members are well past their prime in terms of productive capacity anyway, hobbled variously by war, sanctions and mismanagement,” Bloomberg reports. But the shift of power away from Saudi Arabia and toward Russia spells major trouble for the group’s cohesion, and potentially its longevity.
Earlier this week, Clean Energy Transition portfolio manager Per Lekander told CNBC that he is “very sure” the OPEC+ alliance is going to break. “The more negative growth [there] is, and the less cooperation you have,” he said. If OPEC+, which currently controls about 40% of the world’s crude oil, were to break up, oil prices could nosedive to as low as $35 per barrel.