Could OPEC break up?

opec Pictures, Images and Photos
40% of the world’s oil supply comes from OPEC, the Organization of the Petroleum Exporting Countries. The group is essentially a cartel that meets periodically and decides how much oil they will produce. They usually do not want to produce too much because it lowers the price of the commodity which is bad for their business. Much of their decision making on how much oil to produce is based on what the price will be as a result. However, since the Western world is the largest consumer of oil and OPEC is made up of some unfriendly countries to the West, this decision had been based more on politics than on business recently.

Earlier this month OPEC held one of their periodic meetings to discuss how much oil they should produce. For the first time in 20 years the member countries could not agree on a number. Countries that are looking at it from a long term business point of view and that are more friendly to the U.S. (their largest customer) want to increase production of oil in order to lower the price and make it easier for the economy to recover. Countries that share this feeling are Saudi Arabia, Kuwait, Qatar and the United Arab Emirates. On the flip side, countries like Iran, Venezuela and other countries that are not friendly to the West like the high price of oil. They are not looking at it from a business point of view, but rather a political one.

Iran especially, would like nothing more than to see Americans and Europeans suffer greatly from really high oil prices. They want the U.S. economy to collapse completely if possible because they want to keep building their nuclear weapons program and control the region. An economically weak U.S. will have no time or money to effectively deal with Iran and are more likely to leave them alone. Venezuela shares this sentiment because the U.S. dislikes their President Hugo Chavez and his anti-capitalist policies. These countries want capitalism to fail and a really high oil price only helps their cause.

This means that there is a very real chance that OPEC might break up. If it does occur then it is too early to tell what effect it will have on global oil supply. It seems apparent that some countries will increase their production while others will decrease it. It may result in basically the same levels we are at currently. However, the uncertainty can hurt oil prices in the short term. Taking out the bad apples out of OPEC however (Iran and Venezuela) may end up being a good thing to the world’s economy in the medium and long term. There is not much anyone can do except wait and see how it all plays out. The coming months up to one year will be important for the future of OPEC.