Uncertain future for oil hangs over OPEC
Selling now may be best option
• In the summer of 2000, the former Saudi Arabian oil minister, Sheikh Yamani, made a statement that caused rumblings among energy producers.
“Thirty years from now there will be a huge amount of oil — and no buyers,” he told British newspaper The Telegraph. “Oil will be left in the ground.” He predicted at the time that over the next five years oil prices would collapse, coinciding with a terminal decline in oil markets.
Instead, the opposite happened. Chinese oil demand was rising sharply at the time, and helped fuel a global commodity boom that sent oil prices skyrocketing and encouraged U.S. oil producers to unlock vast shale deposits.
The idea that oil will eventually be left in the ground is not new or surprising, based on the sheer volume of reserves that exist in various pockets of the world. But the persistent glut of oil supply in recent years, as well as slower demand growth for oil, has given the idea a new level of urgency.
“The Saudis are definitely talking about peak demand now,” says Ian Bremmer, the president and founder of Eurasia Group, a consultancy firm.
Speculation has been rampant over whether OPEC member states will reach an agreement in Algiers, Algeria this week to freeze production, particularly as Iran has neared its pre-sanction production levels and certain members totter on the brink of economic collapse.
OPEC’s largest members have so far been hesitant to agree to a deal, both because of a lack of trust between members as well as fears that U. S. shale producers would simply replace any drops in supply. But as low oil prices persist, another wrinkle in this week’s proceedings could be how each country is viewing the lifespan of its reserves.
“The important question from Saudi Arabia’ s perspective, and from every producer’s perspective, is what is the future trajectory of prices compared to the present,” says Omar AlUbaydli, a director for the Bahrain Centre for Strategic, International and Energy Studies.
“Given that they think oil prices are going to be lower in the future — because of electric cars, because governments want to do more to cut emissions and that kind of thing — it makes sense to try to sell as much as they can now.”
The notion of stranded assets comes as the energy market is becoming increasingly segregated. In the past Saudi Arabia acted as the world’s “swing” producer, in which it would often cut production to raise prices or increase production to replace sudden outages in neighbour states. Despite its influence being sometimes overblown, it enjoyed that position for decades.
But ever since a flood of U.S. shale gas and oil entered the market Saudi Arabia, like others, finds itself facing an existential crisis of sorts.
“The fact is the energy revolution, which has until now only taken place in the U.S ., is going togo global ,” Bremmer says. “The Chinese are going to frack, the Argentinians are going to frack, eastern Europeans are going to frack. It’s not going to happen right away, but if you look 15 years out, energy is becoming completely decentralized.”
That decentralization spurred Saudi deputy crown prince Mohammad bin Salman to again warn of diminishing oil markets, as past oil ministers had done before him.
As part of an ambitious goal, the incoming king says he plans to shift the country’s economy away from oil dependency by 2030.
“Mohammad bin Salman’s views would have been seen as absolutely radical just a few years ago,” Bremmer says. “I really do believe that you now have at least some leaders in Saudi Arabia who understand how fast the world is changing, and they see how urgent it is that the Saudis need to change their outlook.”
As part of his plan to reach these lofty targets, bin Salman seems prepared to privatize Saudi Aramco, the state- run oil producer responsible for the bulk of Saudi’s income, though continued low prices would throw a wrench into its initial public offering.
Whether the country can shake free of its oil dependency in such a short timeline has raised plenty of doubt. Saudi Arabia and other Gulf states have been repeatedly warned by the International Monetary Fund and others that they are too dependent on oil revenues, and need to make changes.
It’s not the first time Saudi Arabia has talked about diversification. Similar discussions were taking place during the prolonged oil glut of the 80s, Ubaydli says.
“It was the same story, where the questions that are being asked now were being asked then.”