Flood of new oil supply coming onstream from outside Opec and weakening demand makes the group's role in energy markets less relevant, writes Andrew Critchlow
By Andrew Critchlow, Commodities editor
1:00PM GMT 22 Nov 2014
For how long can Opec keep on pumping? Photo: AP
It wouldn’t be the first time that a meeting of the Organisation of Petroleum Exporting Countries (Opec) has taken place in an atmosphere of deep division, bordering on outright hatred. In 1976, Saudi Arabia’s former oil minister Ahmed Zaki Yamani stormed out of the Opec gathering early when other members of the cartel wouldn’t agree to the wishes of his new master, King Khaled.
The 166th meeting of the group in Vienna next week is looking like it could end in a similarly acrimonious fashion with Saudi Arabia and several other members at loggerheads over what to do about falling oil prices.
Whatever action Opec agrees to take next week to halt the sharp decline in the value of crude, experts agree that one thing is clear: the world is entering into an era of lower oil prices that the group is almost powerless to change.
This new energy paradigm may result in oil trading at much lower levels than the $100 (£64) per barrel that consumers have grown used to paying over the last decade and reshape the entire global economy.
It could also trigger the eventual break-up of Opec, the group of mainly Middle East producers, which due to its control of 60pc of the world’s petroleum reserves has often been accused of acting like a cartel.
Even worse, some experts warn that a prolonged period of lower oil prices could reshape the entire political map of the Middle East, triggering a new wave of political uprisings in petrodollar sheikhdoms in the Persian Gulf, which depend on the income from crude to underwrite their high levels of public spending and support less wealthy client states in the Arab world.
“We are now entering a new era in world oil and we will have lower prices for some time to come,” says Daniel Yergin, the Pulitzer prize-winning author of The Quest: Energy Security and the Remaking of the Modern World. “Oil was really the last commodity in the super-cycle to remain standing.”
Mr Yergin spoke exclusively to The Sunday Telegraph ahead of what is being called the most important gathering of Opec in more than 20 years.
As oil ministers from its 12 member states prepare to fly into Vienna this week they face their biggest challenge since the depths of the financial crisis at the beginning of 2009, as bearish sentiment and oversupply grips the market. Brent crude prices have fallen by almost 30pc since reaching their high point for the year of $115 per barrel in June.
“The oil market is being redefined by two factors. Firstly, the astonishing growth in US oil production, which is real and dynamic. Secondly, the realisation that the world economy is much weaker that was previously expected so demand is being squeezed,” says Mr Yergin, who also sits on the US Secretary of Energy Advisory Board.
The fall in prices comes at a time when Opec’s domination of the world oil market is being challenged seriously for the first time in more than 30 years by the unexpected and sudden resurgence of the US as a major producer. By 2020, Citigroup estimates that America will be pumping more than 14m barrels per day (bpd) of oil and petroleum liquids, giving it the capacity to export almost 5m bpd, which will transform the energy markets.
Lifting the ban on US crude oil exports, which first came into force in the 1970s to ensure energy security, is becoming an evermore likely move by Washington as it seeks to apply pressure on Russia’s President Vladimir Putin to back down over Ukraine. According to the energy advisers IHS, such a move would further stimulate growth in domestic production and cut America’s existing import bill by $67bn, a figure not far from Britain’s total expenditure on defence.
“They recognise that the threat from North American supply is a challenge to Opec today just like the North Sea was in the 1980s,” said Mr Yergin. “Opec is going to have a very hard time adjusting to this because there isn’t agreement within the group on what to do. Everyone is happy for Saudi Arabia to cut production but the Saudis don’t want to cut and lose more market share, especially to Iran and Iraq.”
Opec nations are producing about 200,000 bpd more than their agreed quota of 30m bpd, while demand for the group’s oil is expected to fall as low as 29.2m bpd next year, as more North American supply becomes available. To balance supply with demand would suggest that Opec will have to agree on cutting up to 1m bpd from its members’ production and the responsibility for delivering this will fall mainly to Saudi Arabia.
The kingdom is the world’s biggest and cheapest exporter and because of its ability to immediately pump up to 12.5m bpd is viewed as the “swing” producer within Opec and the world. If the group is to agree cuts, that will mean Riyadh will have to make the biggest contribution to the overall reductions and surrender more market share to its rivals within the group such as Iran and Iraq.
Opec owes its existence to a period of great economic and political upheaval in the 1960s, when demand for crude oil began to surge from rapidly growing industrialised economies and producing countries in the Middle East started to emerge as newly independent states.
Created in Baghdad by five original members including Saudi, Iraq and Venezuela, the organisation offered the first real counterbalance to the so-called “seven sisters” of international oil companies such as Shell and BP, which had dominated global supply up to that time.
The group normally meets a few times every year at its headquarters in Vienna unless an “extraordinary” meeting is called for in response to events such as the Arab Spring in 2010, or the financial crisis. Some members urged such an emergency gathering in response to the current sharp drop in prices but appeals for deep cuts to production have so far been resisted by Saudi Arabia’s oil minister, Ali al-Naimi.
Saudi Arabia is the undisputed dominant force within the group, but its power is increasingly being challenged by an axis of Iran and Iraq. Since the downfall of Saddam Hussein and the exit of a major US military presence in the country, Baghdad has moved closer politically to its Shiite Muslim neighbour Iran. The country holds vast oil reserves and has plans to produce up to 9m bpd by the end of the decade, despite the threat posed by Islamic State militants in its northern provinces.
Iran, Saudi Arabia’s natural enemy in the Gulf, even before the downfall of the Shah in 1979, could also be in a position to boost its capacity significantly, if the West lifts nuclear sanctions restricting international investment in its energy sector.
Both countries need prices to remain high given the weakness of their wider economies and lack of foreign currency reserves, making it likely that they will push for a big cut in Opec production next week.
Iran’s influential oil minister Bijan Zanganeh has already called for emergency bilateral talks with Saudi Arabia in Vienna to discuss the thorny issue of how to accommodate an expected increase in production from the Islamic state.
Last week Mr Zanganeh said: “The countries in the south of the Persian Gulf are interested in keeping their market share and a decrease in market share will be difficult.”
Then there are the non-aligned countries, including Venezuela, Nigeria and Angola. These states account for a combined 6.6m bpd of Opec supply and all hold ambitious plans to boost production. Like Iran and Iraq, they are thought collectively to be pushing for deep cuts to Opec’s quota to restore oil prices back to $100 per barrel, a level required to maintain their economies.
However, Saudi Arabia and its Arab allies in the Persian Gulf appear reluctant to acquiesce to these demands. With relatively small populations and vast oil reserves these producers, which form the core of the Gulf Co-operation Council (GCC), are largely dependent on Western support for their security in an inherently unstable region.
This dependency has recently been demonstrated by the need to rely on the US and the UK to launch air strikes against the Islamic State in Iraq, amid fears that the terrorist group could also destabilise these oil-rich Gulf monarchies if allowed to spread its jihad throughout the wider Middle East.
In this context, Saudi and its allies may be more willing to allow oil prices to fall to levels around $70 per barrel to help appease the US by applying economic pressure on Russia, which also depends on crude sales for much of its foreign currency revenue.
However, these states – which account for about a fifth of the world’s oil supply combined – are also in danger of losing a greater share of the market to US shale production. That threat could be partly nullified by lower prices, which according to Deutsche Bank research would see almost 40pc of US shale oil wells become unprofitable if Brent continued to trade at its currently depressed levels for a prolonged period of time.
However, with break-even prices estimated in the range upwards of $80 per barrel in order to finance their economies these Gulf states, which include the United Arab Emirates (UAE), Qatar and Kuwait, may be reluctant to see prices remain below $100 per barrel for too long. The problem for policymakers in these countries is that Opec’s ability to influence prices has been fundamentally weakened by the rapid growth of supply outside the Middle East.
Opec has seen its share of the market fall from around half 20 years ago to just under a third today, with production from outside the group expected to exceed 63m bpd next year. The need to redress this decline makes the necessity for Opec’s biggest producers such as Saudi Arabia to cut production even more unpalatable and could signal the beginning of the end of the cartel’s global influence.
“The only thing that really unites Opec members now is that they all produce oil but if the price keeps going down then the pressure will build for some kind of action,” said Mr Yergin.
Lower oil prices will also pull at the political fabric holding together many of Opec’s members, especially in the war-torn Middle East. Persian Gulf sheikhdoms have pumped billions of pounds into supporting neighbouring Arab states whose old regimes were torn apart by the popular uprisings, which started as bread riots in Tunisia in 2010.
Saudi Arabia and the UAE have agreed to pump an additional $20bn into supporting the government of ex-Field Marshal Abdulfattah el-Sisi in Cairo, while continuing to support factions in the campaign to oust the regime of Bashar al-Assad in Syria. Falling oil prices will seriously challenge their ability to co-opt neighbouring states and undermine their own domestic economic models, which are dependent on revenue from petroleum exports.
“Riyadh has miscalculated,” says Christopher Davidson, a reader in Middle East politics at Durham University and author of After the Sheikhs: The Coming Collapse of the Gulf Monarchies.
“The Arab Spring never really ended, it was just put off. Certain regimes have been trying to keep those political forces at bay with oil so the current fall in the price will weaken the power of these governments substantially.”
Whatever action Opec takes on November 27, it is clear that its once staggering power over the global economy has been considerably weakened as a new era of lower oil prices beckons.
Even worse, some experts warn that a prolonged period of lower oil prices could reshape the entire political map of the Middle East, triggering a new wave of political uprisings in petrodollar sheikhdoms in the Persian Gulf, which depend on the income from crude to underwrite their high levels of public spending and support less wealthy client states in the Arab world.
“We are now entering a new era in world oil and we will have lower prices for some time to come,” says Daniel Yergin, the Pulitzer prize-winning author of The Quest: Energy Security and the Remaking of the Modern World. “Oil was really the last commodity in the super-cycle to remain standing.”
Mr Yergin spoke exclusively to The Sunday Telegraph ahead of what is being called the most important gathering of Opec in more than 20 years.
As oil ministers from its 12 member states prepare to fly into Vienna this week they face their biggest challenge since the depths of the financial crisis at the beginning of 2009, as bearish sentiment and oversupply grips the market. Brent crude prices have fallen by almost 30pc since reaching their high point for the year of $115 per barrel in June.
“The oil market is being redefined by two factors. Firstly, the astonishing growth in US oil production, which is real and dynamic. Secondly, the realisation that the world economy is much weaker that was previously expected so demand is being squeezed,” says Mr Yergin, who also sits on the US Secretary of Energy Advisory Board.
The fall in prices comes at a time when Opec’s domination of the world oil market is being challenged seriously for the first time in more than 30 years by the unexpected and sudden resurgence of the US as a major producer. By 2020, Citigroup estimates that America will be pumping more than 14m barrels per day (bpd) of oil and petroleum liquids, giving it the capacity to export almost 5m bpd, which will transform the energy markets.
Lifting the ban on US crude oil exports, which first came into force in the 1970s to ensure energy security, is becoming an evermore likely move by Washington as it seeks to apply pressure on Russia’s President Vladimir Putin to back down over Ukraine. According to the energy advisers IHS, such a move would further stimulate growth in domestic production and cut America’s existing import bill by $67bn, a figure not far from Britain’s total expenditure on defence.
“They recognise that the threat from North American supply is a challenge to Opec today just like the North Sea was in the 1980s,” said Mr Yergin. “Opec is going to have a very hard time adjusting to this because there isn’t agreement within the group on what to do. Everyone is happy for Saudi Arabia to cut production but the Saudis don’t want to cut and lose more market share, especially to Iran and Iraq.”
Opec nations are producing about 200,000 bpd more than their agreed quota of 30m bpd, while demand for the group’s oil is expected to fall as low as 29.2m bpd next year, as more North American supply becomes available. To balance supply with demand would suggest that Opec will have to agree on cutting up to 1m bpd from its members’ production and the responsibility for delivering this will fall mainly to Saudi Arabia.
The kingdom is the world’s biggest and cheapest exporter and because of its ability to immediately pump up to 12.5m bpd is viewed as the “swing” producer within Opec and the world. If the group is to agree cuts, that will mean Riyadh will have to make the biggest contribution to the overall reductions and surrender more market share to its rivals within the group such as Iran and Iraq.
Opec owes its existence to a period of great economic and political upheaval in the 1960s, when demand for crude oil began to surge from rapidly growing industrialised economies and producing countries in the Middle East started to emerge as newly independent states.
Created in Baghdad by five original members including Saudi, Iraq and Venezuela, the organisation offered the first real counterbalance to the so-called “seven sisters” of international oil companies such as Shell and BP, which had dominated global supply up to that time.
The group normally meets a few times every year at its headquarters in Vienna unless an “extraordinary” meeting is called for in response to events such as the Arab Spring in 2010, or the financial crisis. Some members urged such an emergency gathering in response to the current sharp drop in prices but appeals for deep cuts to production have so far been resisted by Saudi Arabia’s oil minister, Ali al-Naimi.
Saudi Arabia is the undisputed dominant force within the group, but its power is increasingly being challenged by an axis of Iran and Iraq. Since the downfall of Saddam Hussein and the exit of a major US military presence in the country, Baghdad has moved closer politically to its Shiite Muslim neighbour Iran. The country holds vast oil reserves and has plans to produce up to 9m bpd by the end of the decade, despite the threat posed by Islamic State militants in its northern provinces.
Iran, Saudi Arabia’s natural enemy in the Gulf, even before the downfall of the Shah in 1979, could also be in a position to boost its capacity significantly, if the West lifts nuclear sanctions restricting international investment in its energy sector.
Both countries need prices to remain high given the weakness of their wider economies and lack of foreign currency reserves, making it likely that they will push for a big cut in Opec production next week.
Iran’s influential oil minister Bijan Zanganeh has already called for emergency bilateral talks with Saudi Arabia in Vienna to discuss the thorny issue of how to accommodate an expected increase in production from the Islamic state.
Last week Mr Zanganeh said: “The countries in the south of the Persian Gulf are interested in keeping their market share and a decrease in market share will be difficult.”
Then there are the non-aligned countries, including Venezuela, Nigeria and Angola. These states account for a combined 6.6m bpd of Opec supply and all hold ambitious plans to boost production. Like Iran and Iraq, they are thought collectively to be pushing for deep cuts to Opec’s quota to restore oil prices back to $100 per barrel, a level required to maintain their economies.
However, Saudi Arabia and its Arab allies in the Persian Gulf appear reluctant to acquiesce to these demands. With relatively small populations and vast oil reserves these producers, which form the core of the Gulf Co-operation Council (GCC), are largely dependent on Western support for their security in an inherently unstable region.
This dependency has recently been demonstrated by the need to rely on the US and the UK to launch air strikes against the Islamic State in Iraq, amid fears that the terrorist group could also destabilise these oil-rich Gulf monarchies if allowed to spread its jihad throughout the wider Middle East.
In this context, Saudi and its allies may be more willing to allow oil prices to fall to levels around $70 per barrel to help appease the US by applying economic pressure on Russia, which also depends on crude sales for much of its foreign currency revenue.
However, these states – which account for about a fifth of the world’s oil supply combined – are also in danger of losing a greater share of the market to US shale production. That threat could be partly nullified by lower prices, which according to Deutsche Bank research would see almost 40pc of US shale oil wells become unprofitable if Brent continued to trade at its currently depressed levels for a prolonged period of time.
However, with break-even prices estimated in the range upwards of $80 per barrel in order to finance their economies these Gulf states, which include the United Arab Emirates (UAE), Qatar and Kuwait, may be reluctant to see prices remain below $100 per barrel for too long. The problem for policymakers in these countries is that Opec’s ability to influence prices has been fundamentally weakened by the rapid growth of supply outside the Middle East.
Opec has seen its share of the market fall from around half 20 years ago to just under a third today, with production from outside the group expected to exceed 63m bpd next year. The need to redress this decline makes the necessity for Opec’s biggest producers such as Saudi Arabia to cut production even more unpalatable and could signal the beginning of the end of the cartel’s global influence.
“The only thing that really unites Opec members now is that they all produce oil but if the price keeps going down then the pressure will build for some kind of action,” said Mr Yergin.
Lower oil prices will also pull at the political fabric holding together many of Opec’s members, especially in the war-torn Middle East. Persian Gulf sheikhdoms have pumped billions of pounds into supporting neighbouring Arab states whose old regimes were torn apart by the popular uprisings, which started as bread riots in Tunisia in 2010.
Saudi Arabia and the UAE have agreed to pump an additional $20bn into supporting the government of ex-Field Marshal Abdulfattah el-Sisi in Cairo, while continuing to support factions in the campaign to oust the regime of Bashar al-Assad in Syria. Falling oil prices will seriously challenge their ability to co-opt neighbouring states and undermine their own domestic economic models, which are dependent on revenue from petroleum exports.
“Riyadh has miscalculated,” says Christopher Davidson, a reader in Middle East politics at Durham University and author of After the Sheikhs: The Coming Collapse of the Gulf Monarchies.
“The Arab Spring never really ended, it was just put off. Certain regimes have been trying to keep those political forces at bay with oil so the current fall in the price will weaken the power of these governments substantially.”
Whatever action Opec takes on November 27, it is clear that its once staggering power over the global economy has been considerably weakened as a new era of lower oil prices beckons.
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