NEW YORK (TheStreet) -- The Organization of the Oil Exporting countries (OPEC) has made gross mistakes in the past several years in understanding the evolution of the world oil market and is now suffering the consequences. Despite investor hopes that decisive action in an OPEC meeting scheduled for this week will stem falling prices, such action is unlikely.
Unless a significant, further collapse of oil prices occurs, OPEC will do nothing now. OPEC is counting on lower oil prices slashing U.S. shale oil production, thus doing what the organization is unable to do. This hope is likely wishful thinking.
OPEC's Three Major Mistakes
1. Underestimation of the U.S. Shale revolution. OPEC has long considered the growth of U.S. shale oil production a temporary, marginal and costly phenomenon. In 2013, OPEC thought the break-even for U.S. shale oil was at around $90 per barrel. In 2014, it revised it downward to $70 barrel.
While OPEC was just figuring out the extent of the U.S. shale market, it was already roiling domestic and international prices. In September, the U.S. exported about 4.5 million barrels per day of oil (mostly oil products such as gasoline, given the substantial ban to export crude), helping cause the current precipitous drop in oil prices. U.S. shale production growth has also chipped away hopes by OPEC members to defend an already reduced share of the U.S. market for their crude, and pushed them all to scramble for selling incremental volumes to Asia, where the market has become overcrowded.
Saudi Arabia, a key OPEC member, cut its crude oil prices to the U.S., a move aimed at shoring up its U.S. market share and put pressure on domestic shale oil production. But the discount was too low to displace other crudes available to the U.S. market or to have an effect on the shale industry. (To be sure, Saudi Arabia is not interested undercutting its other customers, particularly in Europe.
2. Complacency to the narrative of "peak oil." Peak oil is the concept that oil production will dwindle and then decline dramatically at some point, thus making OPEC oil more valuable in the long run. OPEC overlooked the impact of technology and high oil prices in making available additional oil resources, even as supplies are under threat, like in many other periods of oil history.
3. Overestimation of world oil demand. Both global economic conditions as well as a focus on energy efficiency and environmental legislation across the world put a cap on oil consumption growth.
OPEC's Poor Options
OPEC's apparent calm stance in facing a disastrous situation it didn't expect in low prices hides the complex and tense relations that make it difficult for its members to act collectively in order to prevent prices from falling even more.
On paper, the organization could do so by allocating production cuts among its members. This could be a necessary step for a group of producers that, on average, need an oil price higher than $100 per barrel to offset their financial requirements, mostly due to huge social programs, domestic subsidies, military expenses and also economic mismanagement. Above all, fulfilling those financial needs is quintessential to preserve -- in most cases -- internal stability and freeze-up creeping political discontent.
But an imminent OPEC production cut is a highly unlikely option because many OPEC nations are already producing far under capacity and they will have trouble agreeing which nations will cut production and by how much.
Saudi Arabia, the largest oil producer and exporter, already has around 3 million barrels a day of spare capacity, and may thereby claim that it's doing more than anyone other member to avoid an oil glut. But Libya, Iraq, Nigeria, and Iran can also claim that they are already producing well below capacity, although not on a voluntary basis. The first three are simply paying a high price to domestic instability, which impedes production. Iran is prevented from producing at full capacity because of international sanctions. Overall, their reduced production deprives the market of another 3.4 million barrels a day that would otherwise flood the market.
Venezuela is facing deep-rooted political mismanagement of its oil sector and attempts to boost production are faltering. Kuwait and the Arab Emirates could only accept cuts if others do the same. The same is true for Algeria. The remaining OPEC members haven't significant room for substantial production cuts.
A unilateral production cut would also mean trouble for OPEC. It would favor all other oil producers globally, and would allow highest cost oils (which are mostly outside of OPEC) to continue flowing.
To make matters worse, trying to find an acceptable compromise is made difficult both by the political and ideological conflicts among largest producers -- like Saudi Arabia and Iran, for instance -- and by the burden of reciprocal suspicion and distrust that comes with them.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication, the author held no positions in any of the stocks mentioned.