Trump broke Opec. He may regret it

US President Donald Trump’s military forays in Venezuela and Iran have weakened Opec more than anyone thought possible just months ago. The White House may view this as a major win, but it may ultimately leave both the US and energy markets worse off.

For decades, the Organization of the Petroleum Exporting Countries, under its de facto leader Saudi Arabia, has exercised outsized influence over oil markets, dialling output up or ​down by tapping spare capacity to manage prices and defend market share.

That influence has long been eroding as the US and other non-Opec members have gained prominence in the past decades. The percentage of ‌global oil production Opec oversees fell from a peak of about 50 percent in the 1970s to roughly 35 percent last year - and down to around 26 percent in March in the wake of the closure of the Strait of Hormuz at the start of the Iran war.

The United Arab Emirates, the cartel’s fourth‑largest producer, quit the group last week after 60 years to pursue its energy strategy free of Opec production quotas, directly challenging Saudi Arabia and its Gulf neighbours.

Trump – a long-time critic of Opec – hailed the UAE’s departure as “great,” arguing it would help push oil prices lower.

That may prove true – ​and the US president’s muscular foreign policy may ultimately prove to be the producer group’s undoing. But a weaker Opec is not necessarily good news for consumers or producers – including the US.

Opec has long been a ​lightning rod for US lawmakers who accuse it of acting as a cartel. Trump has levelled blistering criticism at the group for years. In 2018, he accused Opec of being a monopoly that kept oil prices “artificially high.” After returning to office last year, he renewed pressure on the group to keep prices low.

This year, he went far beyond tough talk.

The lightning-fast US raid on Venezuela in January saw long-serving President Nicolas Maduro ​captured and replaced by a Washington‑friendly government. The Trump administration swiftly took control of Venezuela’s oil sector, redirecting most of its exports to the US and opening the country’s vast oil reserves to Western companies.

Venezuela, a founding Opec member in 1960, ​saw its production wither over recent decades to under 1 million barrels per day as a result of mismanagement, chronic underinvestment and US sanctions. That is less than 1 percent of global supplies.

But output is now expected to rebound as fresh capital flows in. While Trump has not objected to Venezuela remaining in Opec, it is hard to imagine Caracas agreeing to curb output under Opec quotas given Washington’s tight oversight of its energy sector.

The US-Israeli strikes on Iran on February 28 triggered a far more dramatic cascade, leaving Opec fractured and largely powerless.

Tehran sealed off the Strait ​of Hormuz within hours of the first strikes, trapping roughly a fifth of the world’s oil and gas supplies inside the Gulf.

During the 40-day active conflict, dozens of energy facilities were targeted across the Gulf, including tankers, oil and gas ​fields, refineries, pipelines and storage terminals.

The closure and the fighting forced producers to shut in around 10 million bpd, while Saudi Arabia and the UAE diverted some output to ports outside the Gulf.

Washington implemented its own blockade in mid-April while US efforts to break the Iranian blockade have ‌so far done little to revive traffic through the narrow waterway.

Opec’s traditional pillars - Saudi Arabia, the UAE, Kuwait and Iraq - found themselves bereft of their main export route, usable spare capacity and operational flexibility.

In short, they were essentially powerless in the face of the biggest oil shock in history.

This, in turn, created an opening for the vast US oil and gas industry - now the world’s largest in terms of production - to rapidly ramp up exports to Asia and Europe, further eroding Opec’s market share and influence.

America’s position is strengthened, but the US oil industry is driven by market forces. It has no equivalent of Opec’s spare capacity to balance the market.

In the absence of a strong Opec, Trump may find this new environment far less manageable than he bargained ​for.

CUSHIONING THE BLOW

Opec has long played a central role in stabilising oil ​markets, using large volumes of low-cost spare capacity, mostly concentrated ⁠in the Gulf, to cushion the impact of wars and weather events.

It also proved effective in times of oversupply, most notably during the onset of the COVID‑19 pandemic. Trump personally urged Saudi Crown Prince Mohammed bin Salman in April 2020 to slash output and ease pressure on US producers. Within days, Opec+ announced its largest-ever production cut.

Without effective market management by Opec, oil markets ​face higher volatility and fewer shock absorbers to deal with disruptions that are likely to become more frequent as geopolitical tensions rise.

For producing nations, including the US, this would likely ​translate into more frequent boom-and-bust cycles, ⁠higher operating costs for oil companies and, ultimately, higher and more volatile prices at the pump.

SHADOW OF ITS FORMER SELF

It is premature to declare Opec dead. Riyadh will almost certainly seek to steady the group in the coming months and lean more heavily on its alliance with Russia to reassert authority.

Politically, though, the Iran war has left Opec in tatters. Iran’s bombardment of critical energy infrastructure belonging to fellow Opec members, particularly Saudi Arabia, combined with its decision to close Hormuz - once unthinkable - has created deep rifts ⁠within the group ​that may take years to heal, if they ever do.

The most notable thing about Sunday’s Opec+ meeting - which includes Russia - was not the announcement of ​a theoretical quota increase. It was the absence of the UAE.

Opec, as the world has long known it, is gone. Trump and others may eventually regret that.