An Olympian balancing act has been going on in the government ministries of the world’s most oil-rich states over the past year or so. A balancing act that has seen many negotiations frequently fall off the beam.
The Organization of the Petroleum Exporting Countries (OPEC), which accounts for almost half of global oil production and over 80% of the Earth’s proven oil reserves, has been making headlines for infighting.
It began, ostensibly, from the double-shock of COVID-19 and the increase in shale oil production in the U.S. First, as countries shut down around the world to prevent the spread of the coronavirus, oil demand slumped. Travel all but stopped and factory production stood still.
The price of oil dropped by upwards of 60% in the first quarter of 2020, and at one point went into negative numbers. Those holding oil futures were forced to pay people to take the oil off their hands as storage couldn’t match production.
The context of the previous few years, however, made things even more complicated. OPEC was struggling to come to terms with a rapid increase in U.S. shale oil production, which began in 2011 and was continuing to unbalance the global oil market to the disadvantage of OPEC members and other oil giants. Between 2011 and 2020, U.S. shale oil production increased from around 1 million barrels per day in 2011 to around 7.9 million bpd in the midst of the pandemic this July.
The effects on the world market have been so severe that shale oil has been dubbed a “revolution” by such non-revolutionary sounding institutions as the European Central Bank.
In response, OPEC states, including Iraq, the United Arab Emirates, and the de facto leader Saudi Arabia, made a strategic partnership with non-OPEC states, notably Russia, in 2016. This became known as OPEC+.
Alexander Kemp, Professor of Petroleum Economics at the University of Aberdeen, told Al Bawaba that “last year was dramatic for the world but also for the oil industry. Even before the effects of COVID-19 on world demand came in, there was a concern within OPEC that non-OPEC production, particularly from shale oil in the U.S., was rising so strongly that OPEC’s share of the world market was going down.”
OPEC+ was designed to counterbalance this rising U.S. market share. But the partnership essentially unraveled in 2020 when Saudi Arabia and Russia entered into an oil price war (which both deny) over the correct response to Covid-19 slumps in oil demand.
Russia faltered over cutting production and went against OPEC’s agreements. Prices fell and, according to Fatih Birol, head of the International Energy Agency, millions of jobs were put in danger.
The 19th OPEC and non-OPEC Ministerial Meeting has commenced via videoconference under the Chairmanship of HRH Prince Abdul Aziz Bin Salman, Saudi Arabia’s Minister of Energy and Co-Chair HE Alexander Novak, Russian Deputy Prime Minister, together with ... pic.twitter.com/RyjMQIpMj8— OPEC (@OPECSecretariat) July 18, 2021
Then, in early July 2021, OPEC fell into infighting over the speed at which oil production should be increased as the world came out of another huge wave of COVID-19 restrictions. Saudi Arabia and the UAE quarreled over the output levels, negotiations were abandoned and then re-entered, and it all got rather messy, with many commentators foretelling the collapse of the OPEC group which has been central to oil markets for over 60 years.
On top of Covid-19 and U.S. competition, plans to diversify energy sources in the E.U., China, and the U.S. has caused panic amongst sellers in OPEC. Sales of oil and gas assets have increased and provided fuel to the fire of the organization’s internal disputes.
The problem for OPEC members, however, is that they need high oil revenues to pay for the diversification of their own economies away from fossil fuels. “With higher oil prices and higher oil revenues, you have more revenues that can be utilized to diversify the economies,” Alexander Kemp told Al Bawaba. “That’s where the diversification and oil price relationship comes into play.”
A fractured OPEC is going to find it difficult to face the challenges the next decade will bring, not least as the price of renewable energy comes down and availability goes up. A group that once held enormous political sway against the West seems to be faltering. Environmentally it’s promising, but for the balance of global power it's a cause for concern.
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