The Post-OPEC World May Be More Volatile | The Reason Why

The Scottish Highlands have a quiet charm - open, cold, and a little mysterious. In the middle of that landscape sits Achnacarry Castle, one of those classic fortresses that looks like a backdrop for either an old horror film or a good period drama series. But in the summer of 1928, oil tycoons gathered there for a holiday and changed international economics forever.

Nearly a century later, conversations around oil are changing once again. Last week, I wrote about the UAE's exit from OPEC, after which many argued that we may be entering a post-OPEC phase. To understand whether that is truly happening, we first need to understand what existed before OPEC, why it emerged, and how the structure of the oil market is changing today.

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The Pre-OPEC World

We are in the late 19th century. Ordinary Americans could work, read and live after dark because kerosene got cheaper. Oil became essential for families, industries and warfare. But the industry was chaotic. Discoveries led to more production, pulling prices down. Competition turned into a destructive price war, pushing the entire sector into recurring instability. That instability gradually pushed the industry toward coordination.

In 1928 at Achnacarry Castle, executives from Standard Oil of New Jersey, Shell and Anglo-Persian agreed to cooperate rather than compete. The principle was simple: maintain market shares "as is" and coordinate production, pricing and expansion to preserve each other's profitability.

The same logic was extended to the Middle East. After the First World War, the British and the French acquired the territories of the Ottoman Empire. Several Western companies wanted access to these potential oil-reserve regions.

These companies agreed that none of them would independently pursue oil concessions. Any new field, exploration project or production contract inside the territory would have to be pursued collectively. The goal was to prevent price wars and stop governments from pitting companies against each other. This became the Red Line Agreement. The problem was that the governments in the Middle East had no control over pricing, production strategy, shipping or refining. Their role was largely limited to collecting royalties.

OPEC's Formation: The Sovereign Counter-Cartel

The system began to crack in the late 1950s. Soviet Union started exporting oil at a discount to Western companies' prices, following major discoveries. Western oil companies reacted by cutting their prices without consulting the Middle Eastern governments. The governments there depended on oil. For them, it was a reminder that foreign companies could reduce national revenues overnight through decisions taken in distant boardrooms.

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That triggered the formation of OPEC in Baghdad in 1960 by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela. They wanted sovereignty over the monetisation of their resources. It succeeded during the second half of the twentieth century. That battle is largely over.

Energy Transition Changes Producer Incentives

Today, it faces a different challenge from electric vehicles, renewable energy, and decarbonisation policies. Oil producers now fear that if global oil demand stagnates permanently, the remaining reserves may never be monetised or may not command the same value in the future.

Instead of restricting output to preserve long-term pricing power, producers may find it profitable to extract more value while the demand exists. The UAE's exit reflects this shift. With lower fiscal dependence on oil and a far more diversified economy than many of its peers, it increasingly favours monetising reserves before energy-transition dynamics weaken demand.

In such an environment, the marginal cost of production - not cartel discipline - will determine the long-term price floor. Low-cost producers gain while the high-cost producers lose.

Rise of Buyer Power

At the same time, the importance of buyers in the oil market is increasing. China and India dominate incremental global oil demand growth, while the US, unlike when OPEC was created, has become energy self-reliant because of shale production. This does not mean producers lose control. But it means large buyers can influence the terms on which oil is traded.

One way that can happen is through bilateral deals. Producers increasingly compete for long-term access to Asian demand through supply commitments, refining partnerships, infrastructure investments and currency arrangements.

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The second way is through buyers' cartel. This is not a new idea. Back in 2005, then Indian petroleum minister Mani Shankar Aiyar proposed that major Asian importers should coordinate like OPEC to counter the "Asian Premium" often charged by Gulf exporters. China, Japan and South Korea were part of those discussions.

The idea resurfaced again under former petroleum minister Dharmendra Pradhan in 2018. These efforts never evolved into a formal buyers' cartel because importing countries have competing geopolitical and economic interests. However, in times like these, large importers must attempt such initiatives.

Final Take

The history of oil has always swung between coordination and chaos. In the pre-OPEC world, private Western companies turned chaos into coordination by taking control over oil reserves; OPEC later did the same, with producers regaining control of their resources.

Today, the energy transition is pushing producers to monetise reserves and diversify their income sources as soon as possible. And the global order itself is becoming more fragmented and multipolar.

This means that we may drift back toward a pre-OPEC world - one where coordination weakens, producers prioritise market share over long-term discipline, and buyers gain bargaining power. A weaker coordinating structure makes it harder to stabilise prices during periods of oversupply or geopolitical disruption.

Even if OPEC remains influential, the oil market could become more fragmented, more negotiated and ultimately more volatile. These are still early shifts, not settled conclusions. But the structure of the oil market is evolving, and the coming decade may look very different from the one shaped by OPEC.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.

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