Source: About Oil
The global oil scene has always been a battlefield in which the intensity of the commercial skirmishes is only exceeded by the vigor of the geopolitical clashes for the have control over it. This has not changed in recent years, except for the fact that the fighters, weapons, strategies and tactics on that battlefield have been dramatically altered. New technologies have disrupted exploration and production and they created new players that use very different tactics, boosting the oil fortunes of producers like the United States. Hedge funds and new forms of financing operations have added financial players to the list of the new forces that are upending oil markets. National oil companies are working to adjust themselves to the contradictory pressures of the domestic politics of their countries and the international politics that shape their business environment. Traditional multinational corporations face surprising competition from smaller but more agile and brave, rivals. Changes in the patterns and volumes of the demand for oil have also created new realities. In the midst of these revolutionary changes stands the 55 year-old Organization of Petroleum Exporting Countries, OPEC. OPEC is caught in the middle of this epic struggle. Surely, today it has less influence on the market than during its halcyon days. While in 1974 it accounted for half of the world's total supply of oil, today OPEC members account for a third - and their share of total supply is expected to continue to dwindle. But is OPEC an endangered species condemned to disappear? Or will its power to determine global oil prices recover? The turmoil in the structure of the global oil industry has inevitably nurtured a spirited debate about OPEC's future. In this article I have identified some of the most common assertions made about OPEC and discuss how valid they are. Some are true, some false and some others that used to be true are no longer so. The chart summarizes seven of these assertions and my assessment of their validity.
OPEC determines global oil prices - Never true
But at times it wielded substantial price-fixing power. In terms of effectiveness, rather than intentions or public statements, OPEC has rarely been a strong cartel. It reached the acme of its proce-fixing power in 1973, during the Arab oil embargo when decisions taken by OPEC effectively contributed to the sudden quadrupling of oil prices. The energy bill of consuming countries skyrocketed. Since then, OPEC has been essentially unable to exercise significant influence over global oil prices. The diverging interests of its member nations made it very difficult to maintain price discipline while new producing Countries entered the market refusing to join OPEC. Periods of high oil prices have been mostly triggered by geopolitical events outside OPEC's influence. Even today, as Saudi Arabia’s decision to increase production has been an important contributing factor in keeping down prices,the main player has not been OPEC as a whole, but a small and dominant group of Gulf States within the organization. In fact, the decision to keep production levels unchanged runs contrary to the professed policy of OPEC of defending prices by managing output. This recent behavior is nothing new but one more example of what is a clearly identifiable trend whith OPEC behavior driven by the interests and decisions of its larger producers.OPEC is doomed to disappear - False
As is the case of many other international organizations that have lost the relevance they once had, OPEC will more likely enjoy bureaucratic immortality. Although its importance has dwindled, OPEC is not in danger of being shot down by its members. Conceived by third world visionaries in the 1960’s, the organization was given geopolitical legitimacy by its success in raising prices in the early 1970s and also by the ideas and principles expressed by a doctrine called the New International Economic Order (NIOC). The NIOC included as one of its main bedrock the right of nation states to control the extraction and marketing of their domestic natural resources and the establishment and recognition of state-managed resource cartels to stabilize commodity prices and, of course, extract from the richer consuming countries "fair" prices for their exports. Surprisingly, OPEC perceived power was greatly aided by M. King Hubert’s Peak Oil theory, which popularized the belief that oil was becoming scarce in the planet and would eventually become extremely scarce - a perception which further boosted OPEC’s geopolitical power given the fact that its members controlled most of the oil reserves. Once the assumption that the world will shortly use up the oil has been replaced by the theory of an overflow of petroleum, the importance of a cartel that controls an abundant commodity inevitably declined.
The survival of any cartel depends on two main factors: that the commodity it controls is in short supply and that the members of the cartel respect their agreed production quotas and refrain from adding to the supply beyond their allocated quotas, pushing prices down. Today, powerful new forces and actors are scattering these two factors. New sources of energy are entering the market at increasing speed. In Europe, consumption of renewable energy sources has increased some 80% in the last 10 years and some 15% of electricity consumption in the U.S. now comes from renewable sources. Technological innovations such as thin film solar cells could become real game changers in the energy sector. The shale oil and gas boom, which will spread from the U.S. into at least half a dozen other Countries, and the proliferation of independent oil producers are gradually reducing the significance of OPEC’s role in the global energy sector. However, opposite to similar organizations such the International Association of Coffee Producers (IACP) or the International Tin Council (ITC), which folded after they could no longer pay their debts, OPEC is relatively inexpensive to maintain by its very wealthy members. Therefore, the outlook for OPEC is for progressive irrelevance rather than death.
OPEC was created to maintain market stability - False
Even though its leaders are loath to recognized it, since its inception OPEC has been guided by what it calls "the defense" of oil prices. This meant getting prices as high as the market would bear, while avoiding setting them so high that rival producers or new technologies (especially renewables) would become economically attractive. Despite the official line and the speeches about OPECs goal of seeking the elusive equilibrium between supply and demand what in practice shaped OPEC's decisions most of the time was getting the best possible prices without stimulating rivals. In fact, the prevailing strategy of the organization, for years, was limiting its members' output in order to maintain a market dominated by the sellers. Rather than cooperation between producers and consumers, OPEC emphasized a strategy of advantage over the large consuming Countries of the industrialized world, even if its pricing strategy obviously hurt consuming Countries in the developing world. Over time, this strategy of maximizing revenues became ineffective, as individual member Countries which desperately needed oil income to fill the Government's coffers blatantly violated their production quotas thet promised OPEC they would keep. Today, this situation prevails and the most financially strapped members openly flaunt their output commitments. In part as a result of its inability to maintain discipline in its ranks, OPEC is now calling for increased global cooperation between consumers and producers - a move more likely driven by necessity than by conviction.
Saudi Arabia will continue to be its most influential member - True
In the foreseeable future there is no rival to Saudi Arabia within OPEC. Its vast proven reserves of good quality, light oil with relatively cheap production costs insure that the Saudi kingdom will continue to be OPEC leader despite the fact that Venezuela - one of OPEC founders - boasts the world's largest reserves. Venezuela's lower quality, heavy oil is more expensive to produce. In addition, the Venezuelan government has been unable to create a growth-oriented oil industry and, in fact, its production capacity has been declining. Iran’s conventional oil reserves are the third largest in the world but its oil industry continues to be afflicted by poor operational efficiency and a prolonged period of underinvestment. Things can change and Saudi Arabia's oil leadership could be affected by political instability or a geopolitical accident that limits its oil export capabilities while Venezuela and Iran may recover their competitiveness. Still, most experts agree that the most likely scenario is that Saudi Arabia will continue to retain its leading position within OPEC. The Kingdom leadership is well consolidated, not only thanks to its highly efficient management of its oil industry but also because it wields significant influence over its oil and gas producing allies in the Gulf.
The differences in the national interests of their members can be reconciled - No longer true
As in any other type of association the harmony within OPEC could be easily maintained while results were clearly favorable to the producing Countries. The increasing role of independent oil producers in the global market, the boom of oil and gas production in the U.S., China’s increasing reliance in Russia for its energy requirements have greatly contributed to OPEC’s loss of market share and have exacerbated internal frictions among the organization. Attention of member Countries has been diverted to individual survival rather than to collective action. Moreover, the international financial crisis and the anemic global economy have hurt the most fiscally vulnerable members of OPEC. The fiscally exposed Countries need relatively higher oil prices to balance their public budgets or - absent higher prices - they need to export larger volumes of crude in order to obtain the revenues they badly need. The substantial drop of oil prices that began in the summer of 2014 has added pressures for needy OPEC members to export as much as they can to close their huge fiscal deficits. Naturally, this worsens the misalignments between the OPEC members that enjoy a sounder economic situation and the oil producers who are in dire economic straits. The results of the recent OPEC meeting in which higher production levels were confirmed, show that Saudi Arabia is, more than ever, in the driver’s seat and that needy producers will have to fend for themselves.
The boom in the development of shale and gas oil will become global and will further weaken OPEC in the medium term - True
Most shale oil and gas probable reserves are located in non-OPEC Countries, particularly the U.S., Mexico, Argentina and China. In 2010 these resources were estimated by the International Energy Agency, IEA, to be some 5 trillion barrels of technically recoverable oil, a volume more than four times larger than the proven oil reserves of OPEC members (about 800 billion barrels of oil). The development of these resources in the U.S. has already had a large impact on the global oil supply and in the softening of prices. As other Countries start developing their own resources this impact will become even more significant. Moreover, as a recent Financial Times editorial says: “The shale oil industry of the US is emerging as the world’s “swing producer‘, bringing more crude on to the market when prices rise, and putting a ceiling on its potential price — that will probably now be well below $100 per barrel‘. U.S. Shale oil production would behave like a thermostat, set at around $70 per barrel, to control oil price in a much more effective way than OPEC ever did. The FT editorial adds: “rival producers will have to learn how to live with it. Russia needs an oil price of $90 per barrel to balance its budget, Iraq $98, Saudi Arabia $105 and Iran $137, according to Citigroup. Those Countries will have to make potentially painful changes if oil prices remain well below those levels for a protracted period. The risk of political instability will rise‘. Perhaps the only factor external to the operation that could affect oil prices significantly is the futurization of oil revenues by hedge funds and speculators, the massive buying of oil futures as a hedge against inflation and a weaker U.S. dollar.
OPEC is the main enemy of the environment - False
As a producer of fossil fuels OPEC member Countries certainly contribute a large share of the carbon emissions which contribute to global warming. However, the guilty ones are the consumers, not the producers. Governments are also responsible for having so far failed to establish carbon pricing policies that create the appropriate incentives to curb emissions are also at fault. The point is that Governments have the main responsibility of adopting and enforcing carbon emission regulations and to stimulate the shift to low carbon energy producing technology. According to the International Energy Agency (IEA) clean-energy levels are still falling short of those needed to limit the global increase in temperatures to 2 degrees centigrade or less. The Agency calls for tripling the public spending in research and development in low-carbon technologies On the positive side the IEA notes that “global emissions of climate-warming carbon dioxide did not rise last year (2014), for the first time in 40 years without the presence of an economic crisis‘. These good news are credited to shifts in the pattern of energy consumption of China, the world's biggest carbon polluter and seem to be a sign that efforts to control climate change are starting to be successful.
To add to these good news, President Obama signed in March of this year an Executive order requiring the U.S. federal Government to cut greenhouse gas emissions by 40% by 2025, from 2008 levels. Companies such as Lockheed Martin and General Electric are announcing voluntary cuts of their own. Such a move would be equivalent to taking about 5.5 million cars off the road for a year. Most important of all, the G7 Countries decided in their June 8th meeting to develop long-term low-carbon strategies and abandon fossil fuels by the end of the century. These are developments that will have dramatic implications for the global energy picture in the medium to long term. They will also add to the pressured that OPEC faces to maintain its relevance.