Is OPEC Losing Its Power?

For many years, the Organization of Petroleum-Exporting Countries ("OPEC") had arguably been the most significant influence in oil prices. Although it denies being a cartel, its members collude to control oil supply, which drives prices. In spite of demand shocks, it has managed to generally move prices where it pleases. Yet, not even OPEC's supply manipulation could overcome recent economic disturbances, which caused oil prices to plummet last year. Forbes.com has an interesting article discussing OPEC's influence these days, and examines whether or not its influence may continue to dissipate.

The article begins by explaining that oil prices have largely followed the direction of the stock market since their decline last year. That initial price drop was largely blamed on a decrease in consumer demand for oil, brought about by the deep global recession. So it makes sense that, as the global economy seems to be improving, oil prices would also rise.

The picture has changed. Yet, once business goes back to usual, shouldn't OPEC's power be restored? The Forbes article casts some doubt on that:

So who is really in control of the oil price as the market braces itself for a post-summer lull? According to Eugen Weinberg, an analyst with Commerzbank, the power lies in the hands of the Commodity Futures Trading Commission in the United States. The regulator is preparing to crack down on excessive speculation in commodities markets, and has already promised "vigorous" enforcement of trading position limits.


Weinberg predicts oil prices will trade between $65-$75 per barrel after the OPEC meeting and will eventually drop to $50 by the end of the year, with a potentially rapid fall if the C.F.T.C. comes out with a crackdown that is more rigid than expected.



Commodities traders may continue to act as the dominant influence in oil prices -- unless the CFTC puts a stop to their trading. I would argue that such traders have had the major influence on oil prices for some time. I believe they were more responsible for the high prices we saw prior to the financial crisis than OPEC. If the CFTC kills a large portion of the oil trading market, then the price may plummet, as the article anticipates. That is, unless OPEC decides it goes too low and decides to cut supply.

And there's the trade-off. By weakening the ability of traders to speculate in oil trading, you provide greater power to OPEC. That results in a dilemma: who would you rather have the power to control the oil market -- commodities traders or OPEC? The CFTC would likely hand the power back to OPEC through stricter trading regulation. I'm not particularly convinced that's a more favorable alternative.