The headlines at the end of November, following the meeting in Vienna of Opec's oil ministers, were to varying degrees quite hysterical. There were declarations that it was "the end of Opec's power" and much talk of crisis and disarray in the previously all-powerful oil cartel, which once held the world to ransom over the price of a barrel of oil. Also, there was triumphalism about the coming of energy independence for the United States based on shale oil and gas. The abundant new supplies in North America have become available because of new technology that enables companies to get the stuff out of previously impossible-to-reach rock formations.
There were myriad dissections and analysis about what Saudi Arabia, Opec’s de facto leader, was up to with its strategy to keep pumping oil at the same rates even though production is – and will continue to be into next year – at least a million barrels a day more than the world demands. Was it aiming to defend market share and to let prices slide even lower to force off the market some of those more expensive-to-produce supplies, especially US shale oil? Did Riyadh have some foreign policy aims in mind with its low-oil-price strategy, such as keeping pressure on Iran and, in support of its US ally, on Russia, both of which have been suffering from sanctions?
It is at times like this that some historical perspective is needed. Oil prices have indeed seen one of their most precipitous declines since last summer, when the price of world benchmark North Sea Brent crude was above US$115 (Dh422) a barrel. By early December, the decline was about 40 per cent, with Brent trading either side of $70.
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However, the decline followed a relatively long period of high and stable prices – Brent traded at an average of about $100 a barrel in the previous four years. For some countries, such as the UAE, Saudi Arabia and some other Arabian Gulf states, that represented a huge windfall and they built up enormous surpluses in wealth funds that they have used to invest in diversification, both of their investment portfolios and (to varying degrees) their economies.
This was apparent in October’s global economic forecasts by the International Monetary Fund. While the IMF trimmed its forecast for next year’s global economic growth to 3.8 per cent from the 4 per cent it forecast in July, it said the outlook for the main Gulf oil-producing countries was fairly healthy. The growth forecast for the Middle East and North Africa region as a whole for this year was cut to 2.6 per cent from a 3.2 per cent forecast earlier in the year. But the IMF said growth in the six-nation Gulf Cooperation Council countries will remain strong, at an average 4.5 per cent in both 2014 and 2015.
When Saudi oil minister Ali Al Naimi and his UAE counterpart Suhail Al Mazrouei repeatedly said that “there is no need to panic”, before, during and after the November Opec meeting, it is this background they must have had in mind.
It’s true many Opec member countries are under severe strain. As Ann-Louise Hittle, head of macro oil research at the consultant Wood Mackenzie, points out: “The lower oil prices will be painful for Iran, already exposed to reduced oil exports from sanctions, and Venezuela, both of which have high fiscal break-even prices well over $100 a barrel.”
Perhaps the country hit hardest, however, is Russia. "The biggest sufferer is Russia right now, with reports of between $140 to $200 billion already wiped off its GDP because of the fall in oil prices," says Tom James, head of Navitas Resources, a Dubai and Singapore-based energy consultancy. Iran has been suffering too, he says, with sanctions not keeping it from selling its crude, as such, but rather keeping its oil industry from getting spare parts, investment and expertise to maintain production rates. "But I think the real focus of US foreign policy right now is taming the Russians, and the Saudis support that," James says.
It is doubtful, however, that Saudi Arabia and its allies within Opec have made the specific calculation that following a laissez-faire policy and allowing oil prices to find their market level would have some desired foreign-policy impact. The policy is more likely a recognition that Opec as a group had long ago lost its cohesiveness – in the 1990s, for example, it was Venezuela, under a pre-Hugo Chavez pro-free market regime, that consistently refused to hold to its agreed production quotas. Since then, the Saudis have grown tired of having to constantly shoulder most of the burden of being the world’s “swing producer” and in the meantime losing market share. It is also questionable whether the Saudis are specifically targeting US shale production or are simply following the only policy available to them.
Paul Stevens, a fellow at the Royal Institute of International Affairs in London, argues that any attempt to price US shale production off the market while hoping for a quick recovery in world demand is doomed to fail. “Those with knowledge of oil market history will see this as a very dangerous gamble,” he says. “Opec’s expectations of quickly recovering demand may be optimistic, as they were in the early 1980s.”
Indeed, it was Opec’s brief period of success – the oil price “shocks” of the 1970s and early 1980s – that were the seeds of the group’s subsequent weakening, says Stevens, as they gave rise to both demand destruction and rising non-Opec supplies. It is a similar situation now, whereby growth in the large developed economies does not lead to similar growth in the demand for oil. Also, the idea of pricing other oil sources, such as US shale, off the market is misguided, as lower oil prices may well lead those producers to pump more rather than less oil to cover their costs, he says.
The decision by Saudi Arabia and its allies to leave Opec policy unchanged is probably not so much an elaborately worked out plan as a simple recognition that there is not much else they can do.
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Anthony McAuley is a senior business correspondent at The National.