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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Oil Powerhouses Replacing OPEC

Three countries currently account for close to 40 percent of global crude oil production and only one of these countries is a member of the Organization of Petroleum Exporting Countries. The three are Russia, the United States, and Saudi Arabia and as their clout over oil markets increases with rising production rates, OPEC’s is set to decline, at least temporarily.

Reuters’ John Kemp noted in a recent column on the topic that the so-called troika now called the shots more than ever before: all three countries produced north of 11 million bpd a day in October, a record high and more than the combined production of the rest of OPEC. And, according to OPEC, this state of affairs will continue to develop in a direction unfavorable for OPEC with the troika’s combined production rising to over 40 percent of the global total this year while OPEC’s share falls below 30 percent.

Each of the three producers has its own oil production policy that is relatively independent of other producers’. True, Saudi Arabia and Russia have been playing on the same team for the last two years to a large extent because the game strategy has been mutually beneficial. Yet we have seen abundant indications that the moment the interests of the two begin to diverge each is likely to drop the team game and pursue its own priorities. The U.S. in the meantime has become the single largest swing factor outside the OPEC+ club with relentlessly rising production that could push it to the top spot globally next year.

This production will only continue to rise if OPEC now decides to start cutting production once again in order to push prices higher, further strengthening the U.S.’ importance on the global oil market. So, does this all mean OPEC is as good as dead? For the time being, mostly yes. Most of its members, as Kemp notes, fall in one or more of the following categories: “is struggling under sanctions, mismanagement and unrest; is too small to matter; is maximizing production rather than participating in output controls; or simply aligns its output policies with those of Saudi Arabia.” Related: $50 Oil Puts Shale To The Test

The future remains uncertain, however. Most respectable forecasters such as the Energy Information Administration and the International Energy Agency are upbeat about the growth of oil demand, but the upbeat forecasts come with conditions: the IEA most recently said in its World Energy Outlook that producers will need to up investments in new conventional production substantially to be ale to respond to this demand. Failing that, the U.S. would have to increase its shale oil production by as much as 10 million bpd in the seven years to 2025, which is a bold target, to say the least.

OPEC members are obvious candidates for some of this production growth. Despite a lot of worry around the cartel’s spare capacity earlier this year when it became clear the cuts need to be reversed to rein in prices, some of the members, such as Iraq and Libya, are on track to grow their production. True, this growth will likely be nowhere near the more than a million bpd that U.S. producers have added in the past year, but it could be substantial in the case of Iraq, if the political and price conditions allow it.

What’s more, Venezuela and Iran are unlikely to spend the rest of eternity under sanctions. There is a possibility, however, remote at the moment, that these two could at some point reverse the decline in production they are experiencing now. Iran has already demonstrated it could ramp up pretty quickly if given the chance. In other words, OPEC’s clout on oil markets may be waning but it might be too early to bury the cartel for good just yet.

By Irina Slav for Oilprice.com

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  • Mamdouh G Salameh on November 28 2018 said:
    You should differentiate between global oil demand and supply. The country that calls the shots in global demand is China. It already accounts for 11% of global demand and the bulk of growth in demand. It is also the world’s largest importer of oil. And with the launching of the petro-yuan, it will dominate global oil trade by the next decade. Already the petro-yuan accounts for 32% of the global oil trade.

    In the global supply side of the equation, it is true that there are three supermajor players, namely Russia, Saudi Arabia and the United States with some differences between their individual impacts on the global oil market.

    The United States’ impact manifests itself in using US oil production and inventories to manipulate oil prices. But because of its small oil exports, the US hardly impacts global oil supply. Its influence emanates for the time being from its ability to boss Saudi Arabia and blackmail it under the disguise of protecting it from external threats or from shielding it from incidents like the murder of the Saudi journalist. Unfortunately the Saudis have allowed themselves to be bossed by the US since the discovery of oil in their territory even at the expense of their economy and national interests.

    Still, the US shale oil industry will never be profitable irrespective of oil prices.US shale oil producers are so heavily indebted to Wall Street to the extent that they will continue to produce oil even at a loss just to pay some of their outstanding debts.

    And despite the debts, the US shale oil industry will continue to operate not only because it satisfies part of US demand for oil but it also gives the United States a say in the global oil market and enables it to manipulate oil prices.

    An MIT study published in December 2017 reached the conclusion that the US vastly overstates oil production forecasts and that the EIA's weekly forecasts could very well be overstating US oil production by 1 mbd.

    Whilst Saudi Arabia has had a strong and direct impact on the global oil market and prices by virtue of being the de facto leader of OPEC and also by the size of its production and exports, its production couldn’t under any circumstances have hit 11 mbd recently. Saudi oil production peaked at 9.6 mbd in 2005 and has been in decline since. The maximum the Saudis could produce is 9 mbd with any volumes above that coming from stored oil on board tankers and on land. Saudi Arabia has no spare production capacity whatsoever.

    Russia is the world’s largest crude oil producer and exporter producing 11.41 mbd and exporting some 8.19 mbd (crude and refined products). Its influence on the global oil market is huge particularly when coordinating its oil policies with Saudi Arabia. The Russian economy can now live happily with an oil price of $40 or less compared with an oil price above $100 needed by Saudi Arabia to balance its budget and $60-$70 a barrel needed by US shale oil to breakeven.

    As for OPEC, its influence has closely followed the peaks and valleys of the world's demand for oil. September 14, 2018 marked the group's fifty-eight anniversary — more than a half-century of existence characterized by embargo, conflict, and even war. Its influence on the global oil market and prices is vast by virtue of accounting for 42.6% of global oil production and 71.8% of the world’s proven oil reserves. However, its Achilles heel is Saudi Arabia. The Saudis act as America’s Trojan horse inside OPEC.

    Decision-making inside OPEC is quite complicated most of the time. This is because the policies of its de facto leader Saudi Arabia sometimes differ radically from other OPEC members’ in relation to prices and supplies.

    Still, the introduction by US Congress of the so-called bill “No Oil Producing and Exporting Cartels Act,” or NOPEC and the continued haranguing of the Organization by President Trump about lifting its oil production speak volumes about OPEC’s influence and importance in the world of oil.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Stephen Sadd on November 29 2018 said:
    "The U.S. in the meantime has become the single largest swing factor.." What a load of shit!
    The US has shale oil that is rapidly turning past its peak! Stop spreading bullshit!

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