Forbes: Opec is not dead yet, but it has lost control of the oil market
The death of Opec, the oil-producers cartel, has been predicted many times in the past, but rarely from a member of the club which is why this time it might be correct.
So, when Iran’s Oil Minister, Bijan Zanganeh, warned earlier this week on the sidelines of a meeting of the Organization of Petroleum Exporting Countries that a private production deal negotiated between Russia and Saudi Arabia “threatened the existence of Opec” he was not exaggerating.
What particularly annoyed Zanganeh was what he called unilateralism, the teaming of two big oil producers to effectively decide what all Opec members should do.
Not A Happy Club
Adding insult to injury was the fact that one of the countries deciding oil production quotas for the next nine months is not a member of Opec (Russia is classified as an observer) while the other, Saudi Arabia is a regional enemy.
But, behind the latest oil production and price-rigging exercise is an alarming development that no-one in Opec is prepared to admit and that’s the fact that the cartel and its friends have ceded control of oil to the U.S. and will struggle to get it back before the renewable energy revolution hits full steam.
The best way to demonstrate the transfer of oil-control to the U.S. (or should that be return of control) is to consider two questions: which country has the greatest demand for oil and which country is the biggest producer?
U.S. Control Of Supply And Demand
To both questions the answer is the U.S., and while there might be an argument over the precise numbers because of Opec’s artificial production controls the reality is that the U.S. has stormed back into global oil production leadership courtesy of output from shale and other hard rocks which have been tamed by modern technologies such as directional drilling and rock fracturing.
The U.S. is also the leader in total oil and gas demand, with China a close competitor in a global economy which is showing signs of slowing which will further reduce demand for oil.
This is Opec’s ultimate problem because while the cartel’s members might believe they control the oil market, and can increase and decrease production to manipulate the price, the reality is that the game has changed from a time when a small group of oil producers could hold the world to ransom.
Having a supply competitor in the U.S. is a bad enough for Opec, but having a rival which is also the world’s major oil user is double trouble, especially as the reason the U.S. has reclaimed is oil leadership is not simply a matter of having the right geology, it’s more about having the right technology — and that technology is transferable from one oil-rich location to another.
Opec Cuts Matched By A U.S. Increase
The latest production cuts by Opec and Russia might have the desired effect of boosting the oil price though in doing that it also encourages increased U.S. shale output.
In a way, Opec is simply subsidizing U.S. shale-oil production as its members try to get the price to a level where they can balance their budgets.
The irony of what’s happening can best be seen in comments from the Saudi oil minister, Khalid al-Falih, who said after the Opec meeting that U.S. shale oil would one day peak and go the same way as every other oil basin.
“It will peak, plateau and then decline,” al-Falih said.
Even Saudi Oil Will Decline
He’s absolutely right because that’s what happens to every oilfield, and mine, over time.
But what he neglected to add is that the same process of peaking, plateauing and declining is what will also happen to Saudi and Russian oilfields.
What will last a lot longer than the geology of those fields is the technology to extract difficult or unconventional oil and gas in the U.S. and the rest of the world as the technology is mastered and exported.
Opec might not be dead but it’s certainly a club with some anxious members who are starting to worry how long they can stick together.
Source: Forbes/Tim Treadgold