Analysis by Washington-based energy and foreign policy analyst Patricia L. Schouker
The Organization of Petroleum Exporting Countries (OPEC) is over five decades old, however at this point in time, its future seems paradoxically both assured and uncertain - OPEC now owns approximately 77 per cent of known global oil reserves.
By contrast, Canadian tar sands, the wealth of Brazilian oil offshore and the potential of Arctic reserves are nontraditional oil, expensive to bring on the market and put simply, cannot hold a candle against OPEC’s supremacy, at least not for the coming decade.
It is expected that the organisation’s roughly 30 per cent share of world production will increase as those of countries not belonging to OPEC (Russia, Mexico, Norway etc.) may decrease. The international oil order has been turned on its head in recent years thanks to technology and innovation, a changing environment, and mutations within the market itself forcing OPEC to adapt.
"The international oil order has been turned on its head in recent years thanks to technology and
innovation, a changing environment, and mutations within the market itself forcing
OPEC to adapt"
The 12-member group has thus far fulfilled its mission of meeting the world market demand for crude to the best of its ability. But the organisation has changed as the market has changed. This time it is much more stratified and complex than fifty years ago. In particular, OPEC has to deal with many players, sometimes unidentified ones such as financial speculators who have nothing to do with oil but have significant sway on the current oil prices.
Also, developing nations who are most vulnerable to high commodity prices (oil being one of them) are now enjoying the fruits of a low oil price market. What has come to matter most for these countries, in practical terms, is not the high-minded rhetoric of Saudi Arabia, but the reality of the depressed and volatile markets in the industrial world for their own commodities and manufacturers.
As for OPEC itself, it faces its biggest outside threats in the shape of increased competition from other energy sources. Renewables such as wind, biofuels and solar are now in full development and maturity and vying for a bigger slice of the energy mix.
Some contend that oil is threatened by the emergence of these and alternatives such as nuclear, coal, tar sands, and the growing production of unconventional gas trapped in coal which emits less CO2 – the latter could double or even triple gas reserves and become the primary energy source of the 21st century.
The development of substitutes for oil products is a further price-determining factor, however their full effects on the market are uncertain.
Keep pumping at what cost?
If alternative sources for energy and fuel production continue to grow, the dependence on oil declines. This intuitively relaxes the market price, which, in turn, ironically incentivises oil producers to stimulate demand at the same time. Ample evidence can be seen in the heavy investments of Europe, the US, China, and Japan into energy generation from renewable resources including solar, wind, and geothermal power. Some believe instead that, regardless of the development of these alternative sources, OPEC will maintain its market share as emerging countries such as India and China, will need oil for a long time and foster closer ties with OPEC members.
Moreover, the problem is that the development of shale oil has two peculiarities. First, its development took place in the United States, a predominantly oil consuming country and valued customer of Saudi Arabia and OPEC, whereas traditionally consumer countries are not producers.
Second, a number of other consumer countries in Europe and Asia (China) seem interested in the development of this energy source. OPEC is faced with a difficult choice: Should it lower its quotas knowing that a fall in the organisation’s production will be directly substituted by a shale oil production surplus from the Americans?
Or does it engage in a price war by “breaking” the shale oil profitability model and thus stop or severely curtail its development in the US and on a global scale? Observers would say that OPEC has become the de facto banker of the world and chose the latter option by refusing to intervene on two occasions in a row as the market plunged below $40 a barrel.
Though OPEC, often described as a cartel, and led by Saudi Arabia for the most part, is fixated with maintaining a ‘fair price’ and protecting the interests of its future generations by effectively using shrewd ‘real estate’ management practices for its petroleum inheritance.
Low prices would not be a good strategy for the organisation as far as consuming countries are concerned as they might decide to tax more high CO2-emitting energy producers, while maintaining the same retail prices and thus capture oil revenues at the expense of producing countries like those in OPEC.
While a higher oil price will encourage using alternative energies, OPEC does not want to experience again what had happened during the oil shock of 1973. Because of the sharp rise in crude prices, importing countries, won by fear, had turned to other forms of energy such as coal, gas or nuclear.
Even at $30 a barrel, oil remains very competitive. At this price level, biofuels or electric vehicles are not attractive enough without significant subsidies in the long term to become a major competitor.
Along with competition from other energy sources, OPEC is facing a threat from within: Iraq. The gradual return of this historic OPEC member—with its obsolete and historically underfunded and damaged oil infrastructure quickly becoming a thing of the past due to greater modernisation initiatives—could well pose a serious challenge for OPEC’s top spot.
The growing number of oil projects in the country promises an explosion of production capacity in the coming months. However, even though, for the next four to five years, the level of Iraqi production is not a problem, weak demand from emerging markets where a significant portion of its exports is destined for, could weigh OPEC down and turn Iraq into a significant burden.
Strength in numbers
Whatever the ranking in this new alignment of power, both energy surplus and deficit nations are taking bold and often risky steps to enhance their competitive positions. In many cases, this entails the formation of opportunistic associations such as energy supplier groups, like a proposed ‘natural gas OPEC’, modelled on the original one, consumer organisations like the IEA, and even new proto alliances or power blocs among selected exporters and importers, such as the strategic energy alliance between China and Russia.
While it is still too early to foresee the full impact of these arrangements, there is no doubt that a global political realignment of historic proportions – all pivoting around the vigorous pursuit of energy – is now underway.
Does this mean that OPEC has done nothing over the past decade to protect itself against the oil crisis and market collapse? Probably not. Many sovereign funds have been established, especially in the Gulf countries, allowing them to tap into these reserves, for at least two years, during the price collapse without having to adjust or postpone their infrastructure spending, although regional governments are now having to dip into these now.
If one day, OPEC celebrates its 100 years, the ‘club’ could end up with a reduced membership, this time a ‘coalition of the willing’. Collaborative partnerships would fundamentally alter the power dynamics of the new international energy order. Rising economic powers versus a shrinking planet is a dangerous formula, creating resource competition faster than the market can evolve.
This feature first appeared in the September 2015 edition of Pipeline Magazine