OPEC Market Power Measure Takes Years to Adjust

Swings in OPEC’s market power have underpinned oil price movements over the past 50 years. The chart shows the extent to which changes in world-wide oil demand have exceeded (or fallen short of) changes in non-OPEC oil supplies, as one measure of the cartel’s market power. A positive balance shows changes in global demand running ahead of non-OPEC supply changes allowing OPEC to decide whether to increase supply to bridge the difference or edge prices higher. The 1960s until the early 1970s and, again, the latter 1980s until the early 2000s were lengthy periods which left OPEC well positioned to exercise power. Large price increases followed in both instances. It is hard to imagine prices rising sustainably without OPEC producers having their negotiating position vis-à-vis the rest of the world improved. The fiscal needs of OPEC member countries will most likely dictate the extent to which it takes advantage of any power shift. The data also suggest that several years is needed for OPEC to consolidate its position before prices can be affected.