Can OPEC ride out the storm?

Kuwait Times - - FRONT PAGE -

For car­tel OPEC - cre­ated in 1960 with the aim of sup­port­ing a sus­tain­able price on the oil mar­ket it is in some ways a per­fect storm. Stocks have surged thanks to the rapid emer­gence of oil from US shale de­posits. And due to the abun­dant sup­ply, the price of oil now stands at cur­rently less than $50 per bar­rel, around a third of the level of 10 years ago, when it topped a high of $147. This has been ter­ri­ble news for the lead­ing mem­bers of the group - in­clud­ing Iran, Saudi Ara­bia and Venezuela - who have seen holes blown in their hy­dro­car­bon-de­pen­dent bud­gets.

Mean­while, on a longer term hori­zon, the fo­cus has switched from when “peak oil” will be reached - the mo­ment oil ex­trac­tion starts to de­cline due to dwin­dling re­sources - to when de­mand it­self could fall. So the mood as top en­ergy bosses and min­is­ters met at the World Petroleum Congress in Is­tan­bul this week ranged from pen­sive to somber. “It’s hard to come to terms with the fact that this is a dif­fer­ent oil in­dus­try,” said Daniel Yer­gin, the vice chair­man of IHS Markit, who wrote the ac­claimed book “The Prize” on the his­tory of the global oil in­dus­try. “The US will later this year or early next year reach the high­est pro­duc­tion in its his­tory,” he told the congress.

OPEC has no con­trol over the rev­o­lu­tion caused by the pro­duc­tion of shale oil in the United States, which is not a mem­ber of the car­tel. In a bid to push prices up, OPEC and key non-car­tel mem­bers -in­clud­ing Rus­sia, but not the United States - agreed co­or­di­nated out­put cuts in De­cem­ber to push up prices. The cuts were en­vis­aged for six months and ex­tended for an­other three. But so far, they have had hardly any ef­fect - with oil prices still hov­er­ing at 45 dol­lars a bar­rel.

The oil in­dus­try was con­fronted by mar­ket forces “which are strong, stub­born and as a re­sult we are here to­day with prices that are stuck... where they were six months ago,” said In­ter­na­tional En­ergy Agency (IEA) di­rec­tor Fatih Birol. “It will be a very, very dif­fi­cult six months for the oil in­dus­try, a case of rid­ing out the storm,” he said. OPEC Sec­re­tary Gen­eral Mo­hammed Barkindo ad­mit­ted there had been “high ex­pec­ta­tions”

that mar­kets would re­spond to the deal in 2017, but so far th­ese had not been re­al­ized. The fail­ure of the deal to make a dif­fer­ence is par­tic­u­larly irk­some for OPEC as com­pli­ance - the im­ple­men­ta­tion of the pledges - has been over 100 per­cent. Un­de­terred, OPEC and the non­car­tel mem­bers party to the deal will have a com­mit­tee meet­ing in Saint Peters­burg on July 24 to re­view its ef­fects. Mean­while, an ef­fort to tighten co­or­di­na­tion, Barkindo re­vealed that OPEC had held “very use­ful pre­lim­i­nary meet­ings” with US shale pro­duc­ers. OPEC’s own in­flu­ence has also slipped in re­cent years and it now counts for just a third of global oil sup­plies com­pared with 40 per­cent a decade ago. As well as the US shale rev­o­lu­tion, the greater im­por­tance of ad­di­tional non-OPEC mar­ket play­ers - in­clud­ing Brazil and Mex­ico - is also be­ing felt, ac­cord­ing to Sarah Emer­son, head of the USbased En­ergy Se­cu­rity Anal­y­sis.

Mean­while, rapid global changes could also hit de­mand for oil in the long term, es­pe­cially with the ex­pected growth in elec­tric cars. “At what point de­mand stops grow­ing is very much linked to the au­to­mo­bile,” said Yer­gin. “We are see­ing now a con­ver­gence of a whole lot of tech­nol­ogy which will change the na­ture of what ve­hi­cles are,” he said, point­ing also to the growth in ride-hail­ing apps.

But par­tic­i­pants in the congress em­pha­sized that the growth in elec­tric cars was start­ing from a very low base and petrol would likely still be needed in trucks and planes for years to come. Re­new­able en­ergy is also see­ing un­prece­dented growth - en­cour­aged by some tra­di­tional oil ma­jors like BP - while com­pa­nies are un­der pres­sure to re­duce emis­sions in line with the Paris Agree­ment on cli­mate change. But the chief of the Saudi Ara­bian en­ergy gi­ant Saudi Aramco, Amin Nasser, said he was op­ti­mistic that fos­sil fu­els would re­main part of the world’s en­ergy mix for decades to come. “The re­new­ables still have ma­jor chal­lenges and they do not com­pete with oil,” he said. “The en­ergy tran­si­tion un­der­way will be a long, com­plex process,” he added. — AFP

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