About a year ago, Saudi Arabia turned its oil spigots on full in an attempt to maintain market share, the other Opec countries followed suit, and the world was flooded with cheap crude.
The received wisdom is that the club of 13 oil-producing countries is trying to squeeze higher-cost producers like the US shale industry (additionally helping Saudi Arabia beat Russia to become China’s biggest supplier and hitting Iran before US sanctions are lifted next year.) But that theory is looking increasingly fragile in the face of the facts.
The most telling of these is that US oil production has almost doubled in the past four years from around 5.5m barrels a day in 2011 to a peak of 9.7m in April this year.
The recent oil glut has merely forced shale producers to become more efficient. The increase in output has been achieved, despite a reduction in the number of rigs, thanks to a startling rise in productivity – up by 30pc a year between 2007 and 2014.
It is true that there are some signs of strain. The US energy revolution has been financed with cheap debt: the two biggest months for bond issuance by American oil and gas companies since 2014 were February and March this year.
And that party could soon come to an end now that the Federal Reserve has slowly started to extricate the punchbowl. Two-thirds of bank loans tracked by the S&P oil and gas index were trading at distressed levels at the end of November, up from 13pc in May. US shale production has also started to tail off a little in recent months (though nowhere near as much as was expected).
But even if there is a financial reckoning, and a number of shale companies go bust, their operations will merely be taken over by better-run rivals.
The oil is certainly not going to disappear. Experts now believe that the Permian Basin in Texas is capable of producing up to 6m barrels a day – more than Ghawar, the world’s biggest field, in Saudi Arabia. And shale production is relatively flexible – shut it down for a while and it will bounce right back as soon as prices start rising.
Large oil fields in the US
So Opec’s strategy has not worked in the short term and appears doomed to failure in the long term. But perhaps that’s because it’s not a strategy at all.
The group’s fractious meeting last month highlighted internal wrangling that can be traced all the way back to the 1980s – another time of plenty. In an attempt to protect themselves from the disruption caused by the Iran-Iraq war, many countries decided to wean themselves off their dependency on Middle Eastern oil. This led to a boom in exploration everywhere from Alaska via the Gulf of Mexico to the North Sea. Prices fell through the floor and Opec’s market share plummeted from 50pc to 29pc.
Saudi Arabia’s answer was to turn off the taps. There was just one problem: the other Opec countries went behind its back and kept pumping. The furious Saudis switched from one extreme to another, producing so much oil that the price fell to the point at which other Opec members started to feel the pinch and, in due course, fell into line.
Might something similar be happening now? It increasingly looks like the reason Saudi Arabia hasn’t limited production is because it doesn’t trust the other Opec countries to reduce their own quotas.
Arguably, Opec has only been held together since the 1980s by external forces. The price of oil was pushed up by the first Gulf War in 1991, then the long bull market in the US until 2008 and, more recently, by the growth of China.
The recent slowdown in the growth of the world’s second largest economy appears to be prying open the cracks again. It’s widely believed that Saudi Arabia’s production costs are so low that it can continue to make money until the price of oil hits $20 (its fiscal break-even point is, of course, a whole different matter). So it keeps pumping because it doesn’t have any other option.
Slice open Opec’s strategy with Occam’s razor and two plausible possibilities are revealed: either the cartel has spectacularly underestimated the forces reshaping the global energy market or it is so wracked by internecine turmoil as to have been rendered practically obsolete.
Perhaps Opec's not really a cartel at all anymore.