OPEC is meeting on Thursday for its regular monthly review of production policy. This time, no one seems to expect surprises, and the reason is that in the past couple of months, the cartel and its allies in OPEC+ led by Russia have been in remarkable sync. And they appear to have had enough of consumers’ pressure.
The energy minister of the United Arab Emirates sounded a sober note earlier this week as he struck at Western countries for having what can only be described as a hypocritical attitude to fossil fuels.
“I think in COP 26 all the producers felt they were uninvited and unwanted but now we are again superheroes, it’s not going to work like that,” Suhail Al-Mazrouei said at the Global Energy Forum organized by the Atlantic Council in Dubai.
The top Emirati energy official went on to explain the basics of the oil industry, stressing that production is tied to long-term planning, which is incompatible with calls—and actions—on investment cuts in order to put more money into renewable energy.
That should have been obvious to everyone familiar with the very basics of economics, but it appears to have escaped some currently in charge in Europe and the United States. Their reasoning seems to be that oil producers have a vested interest in selling their oil while it is in demand because in 20 years, per climate change plans, demand won’t be that strong.
It is a valid line of reasoning and one that the oil producers themselves have recognized. It is this, at least in part, that has motivated the UAE and Saudi Arabia to invest in boosting their output capacity. The UAE is aiming for 5 million bpd in total production, and the Saudis are eyeing 13 million bpd in production capacity.
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This should be good news for oil-thirsty importers, but this capacity is not coming online this year while the importers, specifically the ones in Europe, are eager to reduce their dependence on Russian oil right now, by the end of the year. The obvious substitute for Russian oil would be oil from the Middle East, but as Reuters’ John Kemp recently explained, this is easier said than done.
Although, theoretically, new markets would be good news for oil exporters, OPEC is still limiting its production, and some members are failing to pump even as much as that limited amount agreed by the OPEC+ group.
Also, as Kemp pointed out in his column, rerouting oil flows from Asia to Europe makes very little strategic sense: Europe is an oil market in decline, unlike Asia. In other words, Gulf producers don’t really have an incentive to sell more oil to Europe. Nor do they have an incentive to join the Western condemnation of Russia.
“When it comes to OPEC+ — I would take that privilege of saying I’ve been at it for 35 years, and I know how we managed to compartmentalize our political differences from what is for the common good of all of us,” Saudi energy minister Abdulaziz bin Salman told CNBC’s Hadley Gamble this week, speaking of the Russian issue.
“That culture is seeped into OPEC+, so when we get into that OPEC meeting room, or OPEC building, everybody leaves his politics at the outside door of that building, and that culture has been with us,” bin Salman also said.
Indeed, one only needs to recall that OPEC involves both Saudi Arabia and Iran, the two Middle Eastern archenemies, and they have managed to act in concert on oil despite their differences.
OPEC, and OPEC+, appear to be stronger than ever. It is hard to believe that just two years ago, Saudi Arabia and Russia locked horns over oil policies and even engaged in a sort of an oil output blitz to make their respective points, pushing prices down sharply just before the pandemic really got going, pushing them a lot further lower. The two cooled off pretty soon and have been working in harmony ever since.
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Crude oil prices slipped briefly below $100 per barrel on signals that the negotiations between Russia and Ukraine had struck a constructive note. However, soon after the news, traders apparently realized this wouldn’t automatically mean the lifting of sanctions on Russia, and prices rebounded, helped by the API’s weekly inventory report, which estimated a decline of 3 million barrels.
The villain-turned-superhero trope is one that is well known and frequently exploited in literature and film. There are plenty of examples of this trope in geopolitics as well, as well as its mirror image of the superhero-turned-villain. Yet OPEC clearly does not want to star in such a film.
OPEC has its priorities, and it is sticking to them, even in the face of growing pressure from its political partners in the West. The latter might need to be more convincing in their assurances that they are committed to this partnership, and even that may not be enough to sway the cartel into producing more oil.
By Irina Slav for Oilprice.com
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The first is that oil and gas will continue to drive the global economy throughout the 21st century and probably far beyond underpinned by a world population projected to rise from 7.9 billion currently to 9.7 billion by 2050 and a global economy projected to grow from $91 trillion currently to $245 trillion by 2050. They shouldn’t let themselves be conned by illusory notions particularly in the Western world about a global energy transition, a peak oil demand and net-zero emissions.
The second principle is that the very last oil barrels produced will most probably come from three regions of the world, namely the Arab Gulf region, Venezuela’s Orinoco Belt and Russia’s Arctic. It is possible that one sinister reason behind the calls for global energy transition and keeping oil underground is to prevent the Arab world, Venezuela and Russia from enhancing their geopolitical and economic influence over the global economy and tightening their grip on global oil reserves in coming years with the continued use of oil.
OPEC+ has emerged from the pandemic the most influential player in the global oil market. It should enhance its spare production capacity and continue to adhere to its current production policies. This is the way forward for it.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London