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OPEC rules again
Edward McBride
From The World in 2008 print edition
The oil cartel is riding high, at least for now
For much of the past few years, energy analysts have been consumed by the fear that the amount of oil pumped each year is reaching a pinnacle, and will soon be in precipitous decline. Fears of “peak oil” have helped to push oil prices to record levels, in nominal terms at least. But in 2008 it will gradually become apparent that it is not oil output that has reached its apogee so much as the power of the cartel that controls its price: OPEC, the Organisation of the Petroleum Exporting Countries.
In the 1970s OPEC held the globe to ransom, pushing oil prices past $100 per barrel in today’s money, and tipping the world economy into recession. But the oil shocks it induced ultimately proved self-defeating. Rich nations began making much more efficient use of the oil they bought, and demand for OPEC’s crude started growing far more slowly than the cartel had expected. Western oil companies and OPEC’s state-owned behemoths alike were left with lots of excess capacity.
To stave off a total collapse in prices, OPEC had to mothball lots of its own rigs. Non-members, meanwhile, pumped as much oil as they liked, and so profited at OPEC’s expense. So even as OPEC’s share of the world’s oil reserves rose, its share of actual production fell. Worse, many of OPEC’s own members gave in to the temptation to cheat, producing more than their allocated quotas and so making it difficult for the cartel to maintain a steady price.
This debilitating cycle has broken down only in recent years, thanks chiefly to a seemingly unquenchable thirst for oil from booming regions like China, India and the Middle East, which have mopped up almost all the world’s spare oil-pumping capacity. Since these places will continue to want ever more oil, there will not be much of a fall in demand in 2008, even if the economies of America or Europe wobble.
The only bright spots are regions such as the former Soviet Union and Africa, where OPEC does not hold sway
In theory, big Western firms should respond to buoyant demand and giddy prices by finding and developing more oilfields. But since they made hay during OPEC’s decades of self-denial, and extracted most of the easily tapped oil in the countries to which they had access, they have run out of easy options for expansion. Instead, they are reduced to tremendously expensive projects to coax crude from beneath the icy oceans of the Arctic, for example, or out of viscous deposits of tar.
The only bright spots are regions such as the former Soviet Union and Africa, where OPEC does not hold sway and where prospecting with modern technology is only just getting under way. But the countries with the most promising terrain for exploration have begun to develop a nationalist streak: Russia and Kazakhstan have made life difficult for foreign oil firms, for example, and Angola has joined OPEC. No wonder, then, that the oil majors are having trouble raising their output: they will continue to flounder in the coming year in the face of limited opportunities, exacerbated by shortages of engineers and equipment.
Meanwhile, since OPEC was always the first to rein in its production in the past, it still has big reserves of oil that are relatively easy to get at. It alone is capable of raising its output quickly—although it will probably choose to prop up the oil price by developing new fields at a leisurely pace. In 2008 the cartel will aim to sell each barrel for between $60 and $80, roughly three times its typical level in the early part of this decade.
The cartel’s members are particularly fearful of increasing quotas just as the world economy is slowing, since the combination of lower demand and expanded supply could cause prices to plunge. So OPEC is more likely to worsen a global slowdown by keeping prices high than it is to ease one by allowing them to fall.
This hardline stance will cause plenty of friction with big oil importers. OPEC’s meetings will attract as much attention and opprobrium as they did in the 1970s. American presidential candidates will issue plenty of ringing denunciations of Saudi Arabia, let alone more militant members of OPEC, such as Venezuela and Iran.
For their part, advocates of biofuels will cite high oil prices, and OPEC’s hand in them, as justification for more subsidies for ethanol and biodiesel. Sales of fuel-efficient cars and hybrids will roar ahead, while gas-guzzling SUVs will fall further behind. Frightened Western governments will announce efficiency drives, and throw money at scientists working on potential miracle fuels and vehicles. In short, OPEC’s latest period of ascendancy, like its brief heyday in the 1970s, contains the seeds of its own destruction—but that will be scant consolation to hard-pressed drivers in 2008.
Edward McBride
From The World in 2008 print edition
The oil cartel is riding high, at least for now
For much of the past few years, energy analysts have been consumed by the fear that the amount of oil pumped each year is reaching a pinnacle, and will soon be in precipitous decline. Fears of “peak oil” have helped to push oil prices to record levels, in nominal terms at least. But in 2008 it will gradually become apparent that it is not oil output that has reached its apogee so much as the power of the cartel that controls its price: OPEC, the Organisation of the Petroleum Exporting Countries.
In the 1970s OPEC held the globe to ransom, pushing oil prices past $100 per barrel in today’s money, and tipping the world economy into recession. But the oil shocks it induced ultimately proved self-defeating. Rich nations began making much more efficient use of the oil they bought, and demand for OPEC’s crude started growing far more slowly than the cartel had expected. Western oil companies and OPEC’s state-owned behemoths alike were left with lots of excess capacity.
To stave off a total collapse in prices, OPEC had to mothball lots of its own rigs. Non-members, meanwhile, pumped as much oil as they liked, and so profited at OPEC’s expense. So even as OPEC’s share of the world’s oil reserves rose, its share of actual production fell. Worse, many of OPEC’s own members gave in to the temptation to cheat, producing more than their allocated quotas and so making it difficult for the cartel to maintain a steady price.
This debilitating cycle has broken down only in recent years, thanks chiefly to a seemingly unquenchable thirst for oil from booming regions like China, India and the Middle East, which have mopped up almost all the world’s spare oil-pumping capacity. Since these places will continue to want ever more oil, there will not be much of a fall in demand in 2008, even if the economies of America or Europe wobble.
The only bright spots are regions such as the former Soviet Union and Africa, where OPEC does not hold sway
In theory, big Western firms should respond to buoyant demand and giddy prices by finding and developing more oilfields. But since they made hay during OPEC’s decades of self-denial, and extracted most of the easily tapped oil in the countries to which they had access, they have run out of easy options for expansion. Instead, they are reduced to tremendously expensive projects to coax crude from beneath the icy oceans of the Arctic, for example, or out of viscous deposits of tar.
The only bright spots are regions such as the former Soviet Union and Africa, where OPEC does not hold sway and where prospecting with modern technology is only just getting under way. But the countries with the most promising terrain for exploration have begun to develop a nationalist streak: Russia and Kazakhstan have made life difficult for foreign oil firms, for example, and Angola has joined OPEC. No wonder, then, that the oil majors are having trouble raising their output: they will continue to flounder in the coming year in the face of limited opportunities, exacerbated by shortages of engineers and equipment.
Meanwhile, since OPEC was always the first to rein in its production in the past, it still has big reserves of oil that are relatively easy to get at. It alone is capable of raising its output quickly—although it will probably choose to prop up the oil price by developing new fields at a leisurely pace. In 2008 the cartel will aim to sell each barrel for between $60 and $80, roughly three times its typical level in the early part of this decade.
The cartel’s members are particularly fearful of increasing quotas just as the world economy is slowing, since the combination of lower demand and expanded supply could cause prices to plunge. So OPEC is more likely to worsen a global slowdown by keeping prices high than it is to ease one by allowing them to fall.
This hardline stance will cause plenty of friction with big oil importers. OPEC’s meetings will attract as much attention and opprobrium as they did in the 1970s. American presidential candidates will issue plenty of ringing denunciations of Saudi Arabia, let alone more militant members of OPEC, such as Venezuela and Iran.
For their part, advocates of biofuels will cite high oil prices, and OPEC’s hand in them, as justification for more subsidies for ethanol and biodiesel. Sales of fuel-efficient cars and hybrids will roar ahead, while gas-guzzling SUVs will fall further behind. Frightened Western governments will announce efficiency drives, and throw money at scientists working on potential miracle fuels and vehicles. In short, OPEC’s latest period of ascendancy, like its brief heyday in the 1970s, contains the seeds of its own destruction—but that will be scant consolation to hard-pressed drivers in 2008.
