Is a change in my previous OPEC recommendation warranted?

It is not my purpose here and now to repeat the several earlier assessments of OPEC I have made since the start of this series on Guyana’s emerging oil and gas sector back in 2016, save and except to recall that OPEC is an inter-governmental body, which has declared its primary goal as the coordination and unification of its members’ petroleum policies. However, since its formation this mandate has had to adapt to several twists and turns in the evolving global context.

In the face of such unprecedented outcomes OPEC has, by and large, in my estimation steadfastly maintained that its core aims are: 1) to secure fair and stable prices for crude oil sales in global markets; 2) to be an economically efficient and regular supplier when delivering crude to global consumers; and 3) to assure a fair return to the capital invested by its members.

There is no denying though that, at its inception, OPEC was seen by most developing countries as an anticolonial and anti-imperialist body championing the cause of poor exploited underdeveloped countries.

Of note, its operating enterprises are state-owned and/or controlled.

This initial narrative placed primary emphasis on OPEC members’ striving for national ownership and/or control of their petroleum resources, in order to pursue the structural transformative use of their petroleum revenues and re-balancing the global distribution of income and wealth. Since the Great Recession of 2007/08, OPEC has seemed more pre-occupied with negotiating global macroeconomic instabilities and uncertainties; financial/economic/political risks; and, their accompanying wider social unrest. Its core membership has nonetheless, remained constant with the others joining, leaving, and re-joining. The body has also welcomed associated allies. These are labelled as OPEC+ members.

To elaborate on this score, at its formation in 1960, OPEC had five permanent Founding members (Iran, Iraq, Kuwait, Saudi Arabia and Venezuela). As indicated, new members have joined, left, and even re-joined the organization! Thirteen members are now current. Requirements for membership of OPEC include being a substantial net exporter of crude oil; and, sharing the body’s fundamental interests. Specifically, to secure membership, an applicant must obtain a majority of three-quarters of the members’ votes. Associate members are permitted. And, as we saw above, its operational paradigm has been re-configured from what it was in the earlier period of the 1960s and 1970s

The bottom line is that, the US Congress has always been distrustful of Saudi Arabia’s authoritarian rulership. This distrust has been greatly enhanced by: 1) its gruesome ongoing war in Yemen; and 2) the murder of dissident Washington Post journalist Jamal Khashoggi in its Istanbul, Turkey consulate.

Assessment on OPEC

Two factors outside of Guyana’s control are of key concern for Guyana’s attitude to OPEC. One is the strong hostility to OPEC, evident in the NOPEC Act, before the United States Legislature. (As the title suggests, the legislation seeks to bring the force of US law into play in order to destroy within the US, and hopefully elsewhere, the essence of OPEC. This essence lies in its cartel or monopolistic origins. The proposed Act seeks to make it illegal to administratively cap oil and gas prices in a nonmarket manner. In this way sovereign immunity is neutralized. This exposes OPEC countries’ assets to lawsuits in the US, especially Saudi Arabia, the largest holder. Further, the practice is to price this oil in US dollars.) A second is that the lead Operator (ExxonMobil and partners) is a United States supermajor. Further to these two considerations, Guyana does not have a state-owned oil company to represent the Government’s interest in the commercial corridors of power and influence in the global petroleum economy. These three factors weigh heavily against participation, at least for now.

At a recent University of Guyana Seminar in crude oil pricing, Robert M. Waltz, a presenter, had advised strongly against Guyana’s membership of OPEC, because such membership carries the obligations of all central members, which is to restrict production at times to protect prices and/or the cartel’s clout in the market place. That I support.

Additionally, I do not believe Guyana has the knowledge and skills required to be an effective global player in even the limited sphere of crude oil marketing. So my recommendation is to wait and see. I do not think the OPEC option, should be decided on so early into the development of Guyana’s oil and gas sector.

Swing Producer

Several readers have sought my views on what is meant by a “swing producer” in the crude oil market. This is a term derived from business economics and is formally defined in Wikipedia as “a supplier (individual or close oligopolistic group of suppliers) of any commodity controlling its global deposits and possessing large share production capacity”. The textbook examples given are Saudi Arabia oil, Russia potash fertilizer and de Beers diamonds.

A swing producer can pursue two generic strategies. One is termed “normal,” as it focuses on using its market power to stabilize the global market, modifying price variability and fluctuations. The other type of swing producer role is “punitive”. That is, using its market power “to grab and extend its market share”.

This term has been rather loosely applied in practice for petroleum markets. It includes producers as varied as the United States shale producers, OPEC, Russia, Venezuela, Iraq, Iran, Saudi Arabia. More recently, countries such as Brazil and Guyana have been added. Clearly all these producers are large suppliers of the type of crude in wide demand. Their supply functions are elastic and low cost, allowing for “low cost” shifts in production and distribution of supplies on a world scale. Such features in their supply functions.

Recommendation

Although well respected oil and energy analysts have projected Guyana’s offshore deepwater deposits as a likely “swing producer,” Guyana’s early oil and gas sector is too much in its infancy for serious evaluation of this profile. It is, however, a testament to how much “world class potential” Guyana’s oil and gas sector possesses.