Opec needs a radical rethink of its energy market management tools
Outside the Gulf region, its members are careening from one crisis to another
The hardest-working oil in the world comes from Saudi Arabia. As the kingdom prepares for next week’s meeting of the Vienna Group — the Organisation of Petroleum Exporting Countries (Opec), Russia and some others — consider a few things those multitasking barrels must do.
You’ll notice I didn’t even get into the issue of rival nonOpec supply, particularly from the US, and how it responds to prices being nudged this way and that. The sheer difficulty of balancing all these interests over the long term should be kept in mind as next week’s drama plays out.
Surely, though, the Vienna Group is basking in victory? After all, their supply cuts drained the inventory glut. But few victories come without casualties, and Venezuela’s collapse has been crucial to making the cuts count.
Less noticed, but also important, has been the slide in Angola’s output.
From the start of 2017 through the end of May 2018, the targets originally set for 11 Opec countries imply 600 million barrels being held off the market. They actually withheld 721 million barrels, and Venezuela alone accounts for 78 per cent of that extra, ahem, discipline.
Stark divide
There will be a stark divide in Vienna between a handful of “haves” and the “have-nots” that are producing flat-out already. The former dominate, given their ability to influence the market by choice.
Yet the mere existence of the have-nots presents a problem that goes beyond next week. Consider this startling fact from Ed Morse, Citigroup’s head of commodities research: 50 per cent of Opec’s oil reserves are held by Venezuela, Iran and Iraq, three countries facing pronounced challenges and, therefore, opposed to raising supply targets.
Even if they don’t get their way, those 600 billion barrels of reserves lay bare Opec’s fundamental problem: It is an increasingly unreliable supplier of an essential commodity.
Rystad Energy, a consultancy, just released updated estimates of recoverable oil reserves. These include both discovered reserves and estimates of discoveries “deemed likely”. They differ markedly from the figures in sources such as BP’s annual statistical review.
This isn’t about one set of numbers being right or wrong. The point is to illustrate that Opec’s traditional strong suit, size of reserves, isn’t immutable.
But Opec has clearly been behind the eight ball on tight oil for years. While logistical constraints present a near-term problem, US output proved resilient to the price crash; and growth is expected to almost match global demand growth this year and cover a majority of next year’s, according to the International Energy Agency.
To be effective, Opec’s members should be able to invest in new capacity and withstand inevitable cycles. What today’s oil market demands, with the rise of shorter-cycle production sources and growing threats to demand, is access to large, low-cost, flexible sources of production. Opec certainly has the scale and, at the operating level, cheap barrels.
But one-trick pony economies mean that, for most, the breakeven oil cost is far higher. That, along with everything from weak incentives for outside investment, resource nationalism, and sanctions, makes most of their output decidedly inflexible.
Opec has won a respite for some members over the past year or so. As a tool for steering the 21st century oil market, though, it is painfully blunt, and getting blunter.