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Another month, another OPEC “crisis.” It’s the usual problem: The cartel, meeting in Vienna this week, can’t agree on how to balance production with price. The Saudi-led oil exporters, boosted by non-OPEC countries such as Russia and Kazakhstan, can’t control price as such so have to imagine how to agree on output levels that may, or may not, maximize revenues.
There is an agreement in principle this time, though “fudge” may be the more appropriate word. There always is, even if it is merely to delay the agreement. But don’t yawn. There are strains on the structure of OPEC and the oil market that are worth noting.
In terms of revenues, OPEC is a shadow of its former self. Oil sales by its members are likely to be around $315 billion this year, compared with $565 billion last year, and $692 billion in 2018. In OPEC’s “good ol’ days” — for example, 2012 — the figure was a gigantic $1,127 billion. 2020 may prove to be a bad year from the producers’ point of view, explained in part by the COVID-19 pandemic’s impact on the world economy, but the trend is clearly down.
The days of the word “OPEC” being synonymous with incredible wealth are well past. The current oil price in the high $40s is inadequate for most members, mainly because they cling to spending levels needed to afford government jobs and generous handouts, which date to when oil fetched $100 per barrel. The government of Iraq, OPEC’s second-largest producer, depends on oil revenues for 92 percent of its budget. Elections this weekend for Kuwait’s national assembly have been enlivened by public discontent over cutbacks and tales of widespread corruption by officials and ministers.
It hardly needs to be said that the energy market is changing. An above-the-fold front page story in Tuesday’s Wall Street Journal announced that “Exxon Mobil Corp. is retreating from a plan to increase spending to boost its oil and gas production … as the struggling company reassesses its next decade.” Royal Dutch Shell, BP and Chevron were also noted as writing down the value of assets: “All three companies cited internal forecasts for lower commodity prices as the cause of the impairments.”
In political terms, OPEC has been propped this year by its pairing with the non-OPEC exporters in “OPEC+.” But it is an alliance of convenience, rather than a long-term relationship. An absurd price war between Russia and Saudi Arabia in March and April ended only after the two agreed on a baseline for production cuts that favored themselves rather than their fellow cartel members.
Interestingly, Saudi Arabia’s leadership of OPEC may be being undermined, if not actually challenged, by one of its supposedly closest allies: the United Arab Emirates (UAE). Abu Dhabi, with almost all the country’s oil, is pushing to increase its notional quota as it brings online new fields to finance, among other things, its growing regional aspirations. Earlier this week, an apparently silly tiff between Saudi Oil Minister Prince Abdulaziz bin Salman and his UAE counterpart, Suhail Al Mazroui, reportedly prompted the Saudi, a son of the king, to offer to resign as chair of an OPEC+ committee in the other’s favor. Point made or bluff called, the Emirati minister backed off. The UAE is rumored to be considering leaving the cartel, though perhaps not for a while.
An additional factor for 2021 likely will be President-elect Joe Biden. Even if it takes weeks or months for the new administration to start functioning smoothly, its declarations so far in favor of curbing climate change set the stage for business decisions in the United States and abroad. Perversely, though Biden said as a candidate that he is not against fracking — rather, only against fracking on federal land — this may lead to increased oil and natural gas production next year, incentivized by a rise in prices.
The price hikes may be annoying for the new administration — and consumers — but also likely will be a further blow to OPEC and OPEC+, setting off arguments about increased quotas and levels of production cheating. Although OPEC internal crises may reoccur, they no longer may be cyclical. Instead of returning to the same point, the trend in the cartel may be towards unravelling.
