What prospects for OPEC?
The World Energy Congress at Istanbul, Turkey on October 10th through 13th, 2016 on the eve of the COP22 of Marrakesh will gather a majority of countries that ratified the agreement of the Paris COP21. It is the first global event to deal with energy and will bring together about 5,000 participants from different regions of the world such as members of the World Energy Congress (WEC), leaders and experts specialists of the energy sectors, leaders of international organizations, researchers, policy makers and leaders but also the media and those involved in sustainable energy development. On this occasion, an informal meeting of OPEC countries and non OPEC with Russia is expected to take place but nothing is decided yet.
1 – Although OPEC countries agreed last month in Algiers to go towards stabilisation of the market, it is now acknowledged in view of the reactions of the market, that the barrel having gained $5 to $6, a 700,000 barrels cut off production would be insufficient for the stabilization of prices range between $50 and $60 dollars a barrel. This is to be confirmed in terms of quotas in Vienna’s official OPEC meeting scheduled in November 30, 2016. It is worth reminding that the decision taken in that Algiers informal meeting committed up to now, only the OPEC countries.
So, on the side of this Congress, a meeting between OPEC and Russia could be held to try and find an agreement between OPEC and non-OPEC producers that is likely to stabilize all crude oil markets. Russia, second largest producer, is willing to cooperate whilst maintaining its stance of not lowering its production, with OPEC countries, notably between Iran and Saudi Arabia, provided and according to Russian officials that these come to agree amongst themselves. The theoretical quotas (but rarely respected) by OPEC members that make up between 33 and 35% of marketed world production, leaving 65 to 67% to non-OPEC are as follows:
| Saudi Arabia | 10.447 |
| Iraq | 4.320 |
| Iran | 3.629 |
| UAE | 2.946 |
| Kuwait | 2.783 |
| Venezuela | 2.095 |
| Angola | 1.782 |
| Nigeria | 1.508 |
| Algeria | 1.087 |
| Indonesia | 0.737 |
| Qatar | 0.662 |
| Ecuador | 0.548 |
| Libya | 0.304 |
| Gabon | 0.320 |
| Total | 33.106 million barrels day |
2 – What of the Istanbul meeting and its impact on the oil market? This meeting will focus like that of the Algiers one on the energy transition of the decades 2020, 2030 and 2040, with most probably the publication of a report on intermittent renewable energy. This report noted that renewable energy in 2016, accounts for more than 30% of the total capacity of power generation in the world and 23% of the total production of electricity, that the funding of renewable energy is about $286 billion in 2015 representing 154GW in new capacity by 2015, exceeding by far the investment in conventional production of 97 GW. Thus, the report highlights three essential factors:
First, the definition of the market rules ensuring a system of sustainable energy in accordance with the objectives of the trilemma, including clearly defined regulations on emissions of CO2;
Second, the markets capacity that could “ensure safety in terms of supply in addition to markets based on energies “often insufficient to ensure a reliable supply based on the further development of methodologies in weather forecasting to ensure better reliability and speed of response to the variability of the wind and the sun. As for the outlook for the fossil oil market, they are at best unpredictable. According to the International Energy Agency (IEA) in its monthly report of September 2016, the oil market will have to take its pain with philosophy, in view of the prospect of the sought after rebalancing under the effect of a demand that is penalized by economic uncertainties and a supply that is abundantly fed.
Indeed, the stabilization of prices is difficult because the supply-demand dynamics would not significantly change over the coming months and the first half of the year 2017 due basically to production continuing to surpass demand. We saw how production of Russian oil amounted to more than 10.5 million barrels per day, while that of Saudi was 10.3 million barrels these last months besides that of the American shale gas, whose costs dropped between 30 and 40%. Saudi Arabia’s strategy that wanted to drive out the American shale producers that supplied in 2016 between 8.5 and 10 million barrels a day, having reached its limits, stands unsure that non-conventional oil extractions collapse altogether – in any case not at the expected pace.
Moreover if on September 30th, 2016, the commercial reserves of crude oil declined by 3 million barrels to 499.7 million barrels, the US reserves of crude oil appeared all the same like to have increased by 8.4% compared to the same period in 2015. China, took advantage of the lower prices to increase its stocks (1) and remaining at historically high levels, can play on both rising or falling stocks to raise or lower prices. With a barrel to $55 / $60, many of US shale deposits would become profitable, thus a further increase supply could be expected. However, imponderable events can influence prices such as the fires in May 2016 in Western Canada, that brought down the country’s oil production by about 1.2 million barrels day, disorders in certain regions like that of the Niger delta in Nigeria or other small disturbances like the decline in Iraqi oil export transfer through Kurdistan or the three-day strike which affected the oil industry in Kuwait whose production dropped by about 1.7 million barrels per day.
3 – In the face of the inevitable new energy transition, OPEC countries should no more live in the illusion of the eternal rentier economy, that could play as a stabilizing factor, in cohabitation with other actors, but not being able to play a key role as in the 70s. Also, between 2017-2020 beyond which no expert could predict anything, the price of oil should normally fluctuate, depending on the growth rate and structure of the growth of the world economy. The oil price would therefore be between $45/65 for a low growth, between $40-45 dollars for an average growth and between $50/60, at most 60/65 up to $ 70 maximum in case of very strong growth; this latter hypothesis should be taken with extreme caution and in the event of a severe global crisis, the price could be below 40 dollars. Besides according to, our information and as announced in the latest report of the World Economic Forum (2016 Davos) the world is on the cusp of a new industrial revolution that will change the balance of power at the global level and…
The two countries with largest reserves, are envisaging their future in diametrically opposed directions; Russia investing in nanotechnology Research and Development (the infinitely small) and Saudi Arabia ploughing $2000 billion of investment away from oil. Because if the world went from the era of the coal to that of oil, this did not mean that there was not anymore reserves of coal (200 years of coal reserves as opposed to 40/50 years for oil), but instead it is that new technologies have been put into place that always refer us back to the Foundation of the development on the economy of knowledge (1). The reserves are and always will be function of the price vector / international cost that could require thousands of unprofitable deposits in light of the global energy changes to be discovered and exploited. It could also be a strategic nonsense to reason on energy consumption in a linear model, relying on the rigidity of supply that could lead in the medium term, because of lack of investment, towards an inexorable rise in price of a barrel.
It is that the analyses of the new energy mutations are wrong-footing or sidestepping all currently ongoing reasoning. In the past, tensions in the Middle East caused a rise or certain volatility in prices, while recently we have witnessed literally a collapse in the price of oil, without any real change in the structure of demand. And it is here that between geo-strategies, and especially that of the European, Chinese, and especially American one that guides the R&D towards new energies, which are committing as of now half of new investments and this in order to maintain their energy leadership at the global level.
In summary, let us beware of any euphoria for according to the Prospects of the World Economy of October 4th, 2016, presented by the International Monetary Fund (IMF), and contrary to the predictions of certain experts, the price of oil would be $51 on average for 2017. But the most worrisome is that the transfer price of conventional gas representing a third of the revenue of say Algeria’s with a forecast of 50 percent by 2020 and according to the IMF reached its lowest in 12 years because not only of the fall in the price of oil, but also by the strength of Russian natural gas supply and the simultaneous weakening of Asian demand. The oil is only a transitional funding resource; the strategic objective for the OPEC countries is to achieve a diversified economy that adapts to the new global changes.
Written by Dr. Abderrahmane Mebtoul, University Professor, International Expert, ademmebtoul@gmail.com
Translation from French by Microsoft / FaroL faro@farolco.onmicrosoft.com
(1) Refer interviews and contributions of Dr. Abderrahmane Mebtoul
- on Chorouk TV on October 7th, 2016 on eight proposed solutions,
- on Beur TV on October 7th, 2016 interview on the informal OPEC/non OPEC in Istanbul on 10 October 2016 on the sidelines of the World Energy Congress,
- by the Chinese International Agency on OPEC, non-OPEC nations to meet to boost prices by Xinhua , October 7th, 2016,
- on Les Afriques international magazine of 30/09/2016 on OPEC-Algiers meeting: Beware of euphoria on the impact of the oil price,
- on MENA-Forum, Guildford, UK, articles in English – “OPEC Algiers’s Informal Meeting” by Dr A. Mebtoul on September 26th, and “Algeria’s 2017 Finance Bill Enacted” by Dr. A. Mebtoul on October 5th, 2016.
