Syed Rashid Husain
OIL markets have undergone complete metamorphosis. US fracking boom, rise in output from all around and the growing emphasis on controlling carbon emissions are impacting the global energy equation. Energy world has changed drastically, and the topography stands completely altered!
Yes, oil is still required and in plenty - all around. But its grip on the global economy has weakened. Oil intensity has gone down, considerably over the last few decades and the process is on.
What does all this mean to the 56-year old OPEC? Is the oil producers’ group still the dominant force, controlling the oil markets – as it used to in its heydays? The influence of the Organization of Petroleum Exporting Countries has closely followed the peaks and troughs of the global oil demand. With all these monumental changes taking place and impacting the global energy demand – supply balance, many today are beginning to sign off OPEC’s obituary – once again.
Founded in September 1960, the objective of the organization was to ensure greater control of the oil producers over their destinies and not to let the oil majors - often termed as seven sisters - control it. It is said, that though commotion beneath the surface was palpable even before, yet when in August 1960 the seven sisters, the concessionaries of the resources, opted to reduce the price of oil, without the consent of the resource owners, the final act was enacted. OPEC was born, asserting the resources belong to the nation states and not the seven sisters. A new era was born!
Beneath the surface, the very idea of resource nationalization was also growing, contributing to the move. OPEC made slow progress initially, reaching its zenith only after the Youm Kippur war. In the aftermath, producers, for the first time enjoyed real control over their precious asset - the black gold. Consequently, oil prices went up - manifolds.
Petrodollars began flowing in, for the first time in real sense. And this helped bring about complete change in the very texture of the entire oil-producing region.
Overnight, OPEC became a thorn in many eyes. The International Energy Agency (IEA) was delivered in Paris by the likes of Henry Kissinger, the Realpolitik practitioner, to basically counter the influence of OPEC and to wrest the control of oil markets from the hands of the producers. It was to take care of the interests of the first world – the major industrial oil consumers.
Efforts, finally began paying off.
Over the decades, slowly and gradually OPEC has been yielding space to others. Today, it no more controls the market. New frontiers are emerging. North Sea, Alaska, Norway, all contributed to the weakening of OPEC control on markets. Today, OPEC is no more in real control. Market forces have taken over. And everyone, from Abdullah El Bedri to Khaled Al-Falih recognizes that.
All this did not happen overnight. There has been concerted effort behind this transition. The fear of Arab control on oil markets propelled many in the Western world to try and work toward energy independence.
And consequent to all this, OPEC market share began dwindling and currently OPEC controls just 1/3rd of the global market. The rest is controlled by non-OPEC suppliers. And even this seems under threat!
With shale oil revolution, the political influence of oil producers waned drastically. The Western world is no more that dependent on OPEC oil as it used to be – once upon a time. This impacted the regional geo-politics too. Growing efficiency also helped the transition.
Consequent to all this, there is a glut in the market. And despite not everyone agreeing to, yet a large number of pundits believe the glut is there to stay for some time to come.
Producers are not oblivious of these changes. They know fully well that things are not that rosy, as it used to be in the gone by days. The stalemate in Doha last month was also an indicator of the reality on ground.
There are many manifestations of the changed topography. Not long ago, fair price was OPEC mantra. Many insisted then that a $100 a barrel price was fair. Others kept the ceiling in 70s and 80s. No more, it seems. “We don’t care about oil prices,” Deputy Crown Prince Mohammed Bin Salman asserted in an April 25 interview in Riyadh. “$30 or $70, they are all the same to us. We have our own programs that don’t need high oil prices.”
Price is no more the real issue. Preserving and keeping intact the market share is now the number one objective. Saudi Arabia, the OPEC kingpin, is much aware of it. It cannot depend on oil – as the sole source of income for long. In the longer run, Riyadh knows it has little option than to get away from oil.
The recently unveiled Saudi ‘Vision 2030’ is a clear manifestation of it. Oil could not propel the kingdom into the next phase of development. Oil alone could not ensure its prosperity – and for long. Hence tactical changes to the overall strategy became a necessity.
There is plenty of oil around – from shale to oil sands and from Arctic to Iran. Saudi Arabia too is underlining it could take its output to 15 million bpd and even 20 million bpd – if required. The overall market sentiments have switched from Peak Oil to Peak Demand. Markets stand totally transformed.
And the ongoing climate debate is beginning to hurt too. The emphasis to wean away the world from fossil fuel is beginning to impact. Consumption growth is slowing. Major oil-consuming nations, China included, are embarking on policies to reduce crude consumption.
Other pressures are building up too. Electric cars may not be far off. Some say they could be just round the corner, especially, if the oil prices tend to get higher, in the shorter run.
Demand security is missing. With the climate change echo growing, the issue of stranded assets are also beginning to haunt some.
In the changing scenario, the role of OPEC has changed. The producers group has seen many obituaries. It has survived all those. This round too, it would. Despite all the internal differences, OPEC would still be around in the years to come, one could say with some degree of hindsight. Yet with the passage of time its clout would only dwindle, one could not help conceding too.
Daniel Yergen had a point when he told the Financial Times, recently: “The era of OPEC as a decisive force in the world economy is over.”
