Today's OPEC meeting doesn't really matter.
Yes, that's right. The decision made in Qatar by the Organization of Petroleum Exporting Countries -- which makes up more than 40% of the world's oil production -- is irrelevant. In fact, a production cut could actually be bearish for oil prices.
The world has changed a great deal since the 1970s. Back then, decisions by this once-powerful cartel could create long lines at gas stations and spark global concerns about shortages of crude and refined products. Now, however, when OPEC starts talking about a cut in production quotas, investors yawn and oil prices actually decline.
What Went Wrong?
Over the past decade, OPEC has slowly lost influence, both inside and outside the cartel. Although it still represents the largest chunk of oil production in the world, other countries like Mexico, Norway and Russia are inching up the production ladder.
In the 1970s, OPEC's dominance held sway in the global markets, but today even the cartel itself knows the limits of its influence. Before today's decision is even announced, Libya's oil minister eloquently attempted to persuade non-OPEC members to join in the production cuts, suggesting they wouldn't be as effective without support from OPEC's non-aligned oil-producing brethren.
However, countries like Norway and Mexico don't have any incentive to play by OPEC's rules. In fact, it's just the opposite: Non-OPEC producers can gain market share when OPEC cuts production.
That's a primary reason for OPEC's lack of influence over its own members. In every single quota decision over the past decade, at least one cartel member (usually almost all of them) has been accused of violating it. That isn't a problem when demand for OPEC crude is greater than its ability to supply. But the chance of OPEC getting individual members to leave money on the table voluntarily by reducing production is slim.
Many OPEC nations have budgetary needs that are only met by oil production. Cuts in production could eventually translate into more cash, as the average price would trend higher over time. But many oil-producing countries are worried about today's needs, not tomorrow's possibilities. Given the thought that a non-OPEC member will fill the leftover gap in supply, most OPEC nations won't think twice about agreeing to a production cut in theory, but ignoring the same cut in practice.
What may make today's OPEC meeting bearish is its potential to highlight the bickering among members about the appropriate production level. Remember, this 1 million barrel-per-day production cut was initially announced as fact without a meeting nearly a month ago.
That seemed to provide some support for oil prices until it became clear that the decision to cut production was far from unanimous among OPEC members. In fact, a majority of OPEC members claimed they knew little about the decision. As the rhetoric increased, OPEC saw no choice but to bring ministers together in an attempt to create the perception of unity.
While there's a chance that the meeting will work, it will probably instead create a stage for more dissent and serve as an even better indication of how fractured any OPEC consensus has become. If that is the case, look for OPEC's announcement today -- regardless of the language -- to be lost in the more important rhetoric of individual countries and their production goals.
Regardless, today's OPEC pronouncement won't likely be taken seriously by the markets.
At time of publication, Edmonds had no positions in any stocks mentioned in this column, although holdings can change at any time.
Christopher S. Edmonds is partner and managing director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.