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|09 December, 2018

Why OPEC needs to adapt for the future

The world still needs OPEC — but OPEC needs to change, starting with better communications with the world and consumers

Russian Energy Minister Alexander Novak, Saudi Arabia's Oil Minister Khalid al-Falih and OPEC Secretary General Mohammad Barkindo address a news conference after an OPEC meeting in Vienna, Austria, November 30, 2017. Image for illustrative purposes.

Russian Energy Minister Alexander Novak, Saudi Arabia's Oil Minister Khalid al-Falih and OPEC Secretary General Mohammad Barkindo address a news conference after an OPEC meeting in Vienna, Austria, November 30, 2017. Image for illustrative purposes.

REUTERS/Heinz-Peter Bader

The successful outcome of the 175th meeting of the Organization of the Petroleum Exporting Countries (OPEC) last week is no reason for the producer group to cheerfully forget about why the gathering was such a tough one.

Up until the last minute, there were concerns that OPEC may not reach an agreement to cut production, leading to a drop in oil prices.

Before addressing the reasons that made the meeting successful, it is important to discuss the factors that made it difficult in order to understand the depth and complexity of OPEC’s problems. 

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It should have been a very easy meeting. The organization gathered at a time of concern about a likely build up in global oil stockpiles next year, in the light of higher-than-expected supplies from outside of OPEC and the prospect of a slowdown in demand for oil.

OPEC’s own numbers show that in order for the market to be balanced next year, supply from the group and its allies should be reduced by 1.3 million barrels per day (bpd). A special Joint Technical Committee (JTC), made up of OPEC and a group of non-OPEC members, had this figure lower, at 1 million bpd.

With oil prices having nose-dived, and a proposed cut that was lower than the previous level agreed in late 2016, the OPEC ministerial meeting should have been easy and straightforward. Unfortunately, it wasn’t.

For the first time in years, OPEC ministers last week convened for more than one day before reaching a conclusion. The reasons for such long deliberations are non-technical and driven by internal disputes and differences of opinion.

Adding competing national interests and political rifts into the mix, what should have been an easy and rational decision turned into a difficult one.

As with every time a cut in production is discussed, many ministers start to support a decision without themselves showing willing to commit to cuts. Smaller producers look at the bigger players hoping that they will shoulder the burden.

The big producers look at things differently. They have volumes and they need to protect their market share. Therefore, any decision should be made in light of supporting prices, balancing the market, and cutting collectively without big damage to each country’s share.

So how did OPEC manage to act together? I think everyone in Vienna knew that Russia played a big role in bridging the gaps in views among OPEC countries, despite not being a member of the organization, instead belonging to the alliance known as OPEC+. 

It is clear that without Russia, the meeting in Vienna would have been no different than the gathering in Doha in spring of 2016, when Iran didn’t want to join the global agreement to cut.

The energy landscape today is changing. On the supply side, the US this year became a net exporter of petroleum, and its legislatures are trying to find ways to break up OPEC’s grip over the world market, despite the organization’s contribution to stability over the years. 

On the consumption side, more political support is being given by consumer countries to electric vehicles and renewable energy sources.

Yet OPEC’s policies are still mainly price-driven, with member countries reacting seriously only when oil prices reach a painful level. And despite all these years of experience, the organization still needed Russia to intervene.

The world still needs OPEC — but OPEC needs to change, starting with better communications with the world and consumers. It also needs to engage in shaping tomorrow’s energy future, perhaps by creating a fund to finance research in clean energy or improving the efficiency of combustion engines. 

The organization’s brand is largely associated with higher gasoline prices at pumps — even though that is not OPEC’s fault, given that consuming nations apply high taxes on products. The recent demonstrations in France against new diesel taxes clearly show how consumer nations are the root of issue — and not OPEC, given that oil prices are much lower today.

Aside from the cosmetics, OPEC needs to enhance its core message and find ways to coexist in a world where consuming nations are trying to weaken its power. No one can afford to see a weak OPEC — but we all need to see a reformed, future-oriented organization.

  • Wael Mahdi is an independent energy commentator specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” Twitter: @waelmahdi

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