Opec at 50: cartel faces new challenges

As the Opec oil cartel celebrates its 50th anniversary, the club can reflect over its recent success. Amid the worst economic crisis since the Great Depression and a savage reduction in oil demand, the cartel has, against the odds, fruitfully anchored oil prices at $75 a barrel.

Half a century after its foundation on September 14, 1960 in Baghdad, Opec has made good its main target: “The stabilisation of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations”.

For sure, the economic recovery has helped, but the cartel did the heavy lifting, cutting a massive 3m barrels a day of production – equal to the oil imports of France and Italy combined. The magnitude and speed of the cut reflects a critical change in Opec’s politics. The cartel’s past attempts to stabilise prices, even in less difficult situations such as in 1998 after the Asian financial crisis, failed because the organisation was marred in internal fights. Since then, Opec has turned away from the politics, becoming a far more technocratic and effective group, focused on oil economics.

The sea change bodes well for the cartel. But Opec has several challenges ahead, some internal, others external, which will dictate whether recent successes continue or whether the inefficiency of the 1990s returns.

The most immediate challenge is generational. For the past 15 years Opec has relied for de facto leadership on the steady hand of Ali Naimi, Saudi oil minister. Mr Naimi, who turned 75 last month, is set to retire in the next few years and Opec will need a fresh line-up of senior officials, leaving the door wide open for beginners’ mistakes.

The new leadership will face an urgent challenge: runaway internal oil consumption, particularly in the Gulf, amid ample subsidies. The international Energy Agency estimates that oil consumption growth in the Middle East, a proxy for Opec, rose by 2m b/d from 2000 to 2010, the second fastest rate after China, denting exportable oil surpluses.

Opec’s diplomacy will be challenging too. The cartel’s focus, which has already swung away from Washington and Brussels, is likely to continue to move towards China, India and other developing nations. The oil club will need to build bridges with new consumers, exchanging security of supply for security of demand. An agreement on prices, around current levels of $75 and on investments in refineries to secure captive oil demand, will both be crucial to sustain long-term oil consumption growth in developing nations.

The need for a new diplomacy comes as the world becomes increasingly reliant on Opec. The US Department of Energy forecasts that the cartel will account for the bulk of new oil supply between now and 2030. Yet the club faces a challenge to meet rising oil demand: most of its membersneed to tap more difficult oil fields for the extra supply, after running out of the easy oil. The moves by Libya to drill offshore or by Venezuela to tap the bitumen of the Oronico belt are examples of the trend towards more difficult oil.

All the worries about fulfilling the world’s need of oil could end in just that, worries, on the hands of a wild card: Iraq.

The prospect of rising production from the country is Opec’s biggest challenge over the the two decades. Ironically, the country where the cartel was formed will test the group the most. Baghdad plans a massive expansion in ouptut, from 2.5m b/d now to about 10m b/d by 2020. For sure, not all the boost will bear fruit. Yet the size of the extra production is still staggering. If the global economy falters and, with it, oil demand growth slows, other Opec nations will need to cut their own supply to accommodate Iraq, a challenging, if not contentious, proposition.

Finally, Opec will have to navigate a challenging new energy mix as well as ongoing implications of the fight against climate change. The world is becoming more dependent on natural gas, particularly for electricity, and less dependent on oil. At the same time, biofuels are making inroads and other forms of energy, from coal to nuclear, are making a return. The world is also trying to cut the use of fossil fuels to reduce carbon dioxide emissions. Opec needs to adapt to these emerging trends, rather than fight them.

If Opec resolves these challenges, the future for the cartel looks upbeat: a peaceful middle-age after a difficult young adulthood.

The comments by Ian Skeet*, who for years observed Opec from its watchtower as head of government and international relations at Shell, sound today as true as they were 25 years ago: “Because we cannot see the future, we cannot know how it will turn out. What can be said is that the international oil trade will continue, that the main supplier of that trade will be the countries which today form Opec and that Saudi Arabia will remain the single most important influence on oil price”.

* Opec: Twenty-five years of prices and politics, Ian Skeet, Cambridge Energy Studies