PETROANALYSIS || ARTICLE

Oil Demand at the Crossroads

Published on

November 22, 2019

in

Article by

Mazhar Al-Shereidah

In the very long run, producers should agree with consumers on an ultimate reduction in the share of consumer’s oil supplies, but producers may take a different stand on the speed and timing of the energy transition period. (1)

“OPEC at the Crossroads”. Fadhil J. Al-Chalabi, 1989

We understood the Saudi-Russian understanding and agreements as pillars of the present international oil order…a new structure is emerging based on tangible facts and realistic visions. Ideology stands aside. (2)

“OPEC: Re-tuned Concepts”. Mazhar Al-Shereidah, PetroAnalysis, October 2019

 

The 14th September 2020 will mark the sixtieth year since the founding of the Organization of Petroleum Exporting Countries. This being said, the OPEC Secretary General, Sanusi Barkindo, in his introduction to the “World Oil Outlook 2019” gave words that are of particular importance for an adequate understanding of such an important Organization. It is a document worth analyzing:

“This year’s WOO [World Oil Outlook] once again highlights the industry’s challenges, as well as its opportunities, and underscores the vital requirement for a serious and thorough evaluation of all the factors, drivers and risks to our common long-term energy future.

Non-OPEC supply prospects have been revised up sharply, as US tight oil, in particular, has again outperformed expectations. While there continues to be talk of more financial prudence in the tight oil patch, prospects for growth remain given that efficiency and technology gains have further increased. The expectations of a return to growth in some key mature producers, such as Norway, major new field start-ups in Brazil, Guyana and elsewhere, mean that other sources of non-OPEC supply will also likely have a meaningful medium-term impact.

In the long-term, however, it is OPEC that will be expected to meet the majority of oil demand requirements. Demand for OPEC liquids will rise to 44.4 mb/d by 2040.

For the downstream sector, the medium-term outlook envisages significant crude distillation capacity additions of around 8 mb/d between 2019 and 2024, with over 70% of the additions in the Asia-Pacific and the Middle East. Moreover, this is close to 50% of the total capacity additions required in the long-term to 2040.

In terms of trade, the global crude oil and condensate trade is estimated to remain relatively static at around 38 mb/d between 2018 and 2025, before increasing thereafter to around 42 mb/d by 2040. While the US & Canada are expected to increase crude and condensate exports in the medium-term, in the long-term the major trade route remains the Middle East to the Asia-Pacific.

Given this outlook, there is clearly the requirement for major oil industry investment. In the period to 2040, the WOO sees the need for around $10.6 trillion of investment across the upstream, midstream and downstream sectors. OPEC Member Countries are fully committed to making the necessary investments to keep consumers well supplied, and the issue of returning global investments is a core focus of the ‘Declaration’ and ‘Charter’.

On the policy front, however, the industry is now concerned about policies that may detrimentally impact investments; for example, those related to climate-related financial disclosures. It is important to stress that OPEC is fully engaged and supportive of the Paris Agreement. As responsible citizens, we believe that there is no Planet B, and our Member Countries are making significant efforts to diversify their economies and make investments in renewables and energy efficiency measures.

We also believe that the oil industry must be part of the solution to the climate change challenge. The science tells us that we need to reduce emissions; it does not tell us that we need choose one energy over another. Thus, we need to continually look to develop, evolve and adopt cleaner energy technologies across the board; ones that enable us to meet expected future energy demand, in a sustainable and ever more efficient manner and where no-one is left behind.

With OPEC’s landmark 60th Anniversary taking place in 2020, the WOO 2019 helps establish a platform for discussion in the coming year by laying out possible future oil and energy paths.

This year’s WOO once again highlights the industry’s challenges, as well as its opportunities, and underscores the vital requirement for a serious and thorough evaluation of all the factors, drivers and risks to our common long-term energy future.

We look forward to further broadening our cooperation and dialogues with all industry stakeholders. It is a never-ending process, but one OPEC is fully committed to, in the interests of producers, consumers, the global economy, and the world as a whole.” (3)

According to “OPEC: Re-tuned Concepts”, from PetroAnalysis of October 2019, in order to make significant decisions time is needed and the environment must be appropriate. In addition, the choice of partners with which common objectives are to be achieved goes through a long period of observation and scrutiny.

“Oil market stability is important for a large number of players, but those who are the major exporters are obviously more concerned, and their burden is heavier. Thus, although Energy Ministers do have very important responsibilities, the final strategic decision is a political one and has to be taken by the respective Heads of State.

However, in some very important oil producing and exporting countries governments simply have no control over their respective hydrocarbon industries. In spite of the very strategic and vital importance to national interest considerations, the private sector has its own interests and calculations and thus cannot be forced down a pre-defined road. Nations with these conditions do not qualify to be part of the international agreements needed to furnish the oil market with the required stability.

So, it is from this point of view that one could gain a better grasp of the importance and scope of the very recent understanding reached by the two major oil exporters, Saudi Arabia and Russia. This is crucial not just for both countries but rather for the whole oil industry i.e. countries, companies, and organizations.

Once policies are put in place with regard to the price of oil, this will certainly be felt on the supply side and will have an effect on inventories.

OPEC, of which Saudi Arabia is a prominent founding member, seems to be in a different position from now on, as finally Russia joins the process of assessing the price that is considered by both governments as the most convenient to ensure healthy growth rates of the world economy.

If this is looked at carefully, then it is not a completely new objective when compared to the Resolutions approved on the 14th of September 1960 when OPEC was founded.” (4)

 

The Stability of Global Energy Markets… Oil Price and Inventories

Mike Sommers, President and CEO of the American Petroleum Institute, wrote a letter on February 5th 2019 to the Chairman of the Senate Judiciary Committee, Lindsey Graham, and the other Ranking Members of the same Committee, in which he said: “The American Petroleum Institute (API) opposes H.R. 948, the No Oil Producing and Exporting Cartels (NOPEC) Act, that is expected to receive a markup in the House Committee on the Judiciary soon, as well as related legislation that may be considered by the Senate.”

PetroAnalysis commented on this issue in order to contribute to the clarification of the very basics of the oil market, given the fact that Mike Summers had to make a direct reference to the Sherman Act, that was passed by the US Congress in 1890, in order to clarify his arguments that it is not in the national interest of the US to engage in some sort of a trade war with the OPEC+ group.

Similarly, Dan K. Eberhart considers that the time to see OPEC as an enemy has passed, and punishing OPEC would be a huge mistake for the US. OPEC’s moderating role has allowed the US oil sector to achieve record oil production and has made America a major energy exporter, something that seemed impossible less than a decade ago. More often than not in recent years, the cartel has succeeded in keeping the price of oil just high enough to spur investment in new shale fields, but low enough to keep consumers happy. Rather than competing with America, though, OPEC led by Saudi Arabia, has been holding back about 1.2 million barrels of production a day from the market, making room for US shale producers to continue to increase output, adds Eberhart.

The U.S. Energy Secretary Rick Perry commented on the bill on the 28th February: “We need to be really careful before we pass legislation that may have an impact that goes way past its intended consequences.” He said that the bill could reduce supply management by oil producers in global markets, possibly leading to a glut of oil and lower prices. That could have the unintended effect of eventually pushing many producers out of the market, which would send prices back up.
Indeed, inventories increase without supply management, and it is this very issue, that of inventories, about which Russian president Vladimir Putin recently expressed serious concerns. “But on the technical front global inventories need to be reduced to a reasonable level so they do not put pressure on prices.” He said on the 13th October 2019 ahead of his historic visit to Saudi Arabia, where in Riyadh, Putin received a Czar-like reception. (5)

It should be remembered that King Salman bin Abdul-Aziz Al Saud had already been to Moscow in October 2017, and his visit there was an attempt to turn Russia-Saudi “relations” into a “relationship”. This time, Putin sought to fill this relationship with some substance that was long missing between these two main oil exporters. Driven by this idea, Putin brought with him to Riyadh almost all his state ministers and around 100 top Russian tycoons and other business executives.

Putin told Salman in his introductory remarks: “We see Russian-Saudi coordination as an indispensable element for ensuring security in the Middle East and North Africa. I am convinced that without your country, it is hardly possible to achieve a just and long-term settlement of any problem in this region,” and he added when addressing the Russian-Saudi Economic Council: “We consider Saudi Arabia to be one of Russia’s leading economic partners.”

Before Putin landed in Riyadh, Russian and Saudi businesses and state agencies signed 20 joint cooperation agreements. In the presence of the Russian president and the Saudi king, 21 more deals were signed:

“We welcome the investments by the Russian Direct Investment Fund [RDIF] into more than 30 projects of the Public Investment Fund of Saudi Arabia [PIF],” Salman said.

“Our trade is growing. Last year it increased by 15% and grew by another 38% in the January-July period. With your support, the PIF has allocated $10 billion for joint projects with the RDIF. The mechanism of automatic co-investment is also functioning well. We have reached agreements on new initiatives involving Saudi investment,” Putin replied.

Kremlin spokesperson Dmitry Peskov said that military and technical cooperation also was discussed: “There is nothing to say yet [about possible S-400 missile system sales to Saudi Arabia], but there are plans. We are hoping that this military cooperation dialogue will be continued.”

Putin noted that Moscow and Riyadh “have a good plan for joint activities in the military and technical cooperation sphere.” He stressed that Saudi Crown Prince Mohammed bin Salman is “particularly interested” in this area. The Crown Prince hosted Putin for separate talks. Syria, Yemen, oil prices and the bilateral relationship dominated the agenda. Both of them emphasized “the importance of combating extremism and terrorism and working to dry up its sources.”

Prior to the Saudi visit Putin spoke of the need to decrease oil stockpiles to “reasonable levels” so that they “don’t put pressure on prices”.  (6)

President Putin said mid-October that global oil inventories need cutting to “reasonable levels” and that Russia would work with Saudi Arabia and other partners to “reduce to zero” attempts to destabilize oil markets.

He was speaking in an interview with Arab broadcasters including Al Arabiya TV ahead of a visit to Saudi Arabia, which comes after attacks on Saudi oil plants on the 14th September that initially halved the output of the world’s top oil exporter.

He said that a series of strikes on oil tankers in Gulf waters, and more limited assaults on Saudi oil assets in recent months, would strengthen cooperation between producers inside and outside OPEC, an alliance known as OPEC+:

“If someone thinks such acts, seizing tankers and attacking oil infrastructure, will in any way affect Russia’s cooperation with our Arab friends, Saudi Arabia and the United Arab Emirates, or in any way destroy OPEC+ cooperation, then they are all wrong,” he explained, according to an Arabic-language transcript shared by Saudi-owned Al Arabiya, “Quite the opposite, this will unite us because our goal is stability of global energy markets,” he continued, “But on the technical front global inventories need to be reduced to a reasonable level so they do not put pressure on prices.”

OPEC, whose de facto leader is Saudi Arabia, and non-OPEC producers led by Russia, have since January implemented a deal to cut oil output by 1.2 million barrels per day to support the market. The pact runs to March 2020.

Putin noted that while Russia condemns such acts, there was no confirmed information about who carried out the assault, adding that anything upsetting market stability should be met with a “responsible response”, but did not elaborate. He said Moscow would work with Riyadh and its other Arab partners to “reduce to zero” attempts to destabilize energy markets.

Saudi energy minister Abdulaziz bin Salman told Russian journalists: “I very much like the words of President Putin. He understands we need to take any steps to prevent turmoil in the market. We need to take some additional steps to ensure the stockpiles are back to normal but let’s see what we come up to [at the OPEC-plus meeting] in December.” (7)

As PetroAnalysis wrote in a special report in August 1999, inventories are an arsenal that simply kill prices. Expressed in a different way, global inventories need cutting to a “reasonable” level.

That article which was written for intra-OPEC discussion, asked why it was that in the previous year the price of Brent was at $12/b and now was at $20/b. Had demand grown 2.5% as they had affirmed, or hardly 1.3%? If demand is growing very moderately; if we are in the season of the year where there is less oil demand; if the Asian economies and Russia continue in recession; and if the NATO campaign in the Balkans has ceased; then to what can the price increase be attributed to?

Who outside OPEC increased the offer if world production in the first half of 1998 was 74 million b/d and now is some 71.5 million b/d? It seems that some people have not been interested in inventories: such a fundamental factor that influences prices.

In June 1998 there were global inventories for a total of 5,924 million barrels, of which the OECD countries held 4,021 million. At the moment (1999), the respective figures are 5,867 and 3,955 million barrels. That is to say that throughout more than a year, since that theoretically the Riyadh Accord came into force in April 1998, until today, 166 million barrels have been taken out or drained from the deposits of the 29 OECD countries, equivalent to a rhythm of less than 400 thousand barrels a day. Thus, almost thirty years would be required to exhaust them.

If we take into account that OECD petroleum consumption is in the order of 42.5million b/d, of which their own production satisfies more than 20 million b/d, their dependence on imported petroleum is limited to some 22.3 million b/d from the whole world, and from these some 16.7 million b/d come from OPEC. It is this OECD import dependence from the OPEC area to the tune of approximately 76% that gives the effect on prices to OPEC’s decisions and to their strict compliance.

It is a fact that OPEC supplies 6.3 million b/d of the 7.4 million b/d that OECD Europe imports. Of the 5.9 million b/d that Japan imports, 4.7 million b/d correspond to OPEC. More than the 9 million b/d that the USA imports come from OPEC. It is there that OPEC’s strength is rooted.

But still there are inventories that total almost six million barrels. This is the arsenal of the great consumers. Nobody inside or outside of OPEC has the most remote intention of denying an adequate supply to all consumers. The ideologically antagonistic blocs exist no longer, the supply is secure and abundant. It is only needed to vindicate the positions to build an equitable world of mutual trust.

There are “intelligent” bombs that only kill people. Inventories do the same with prices. (8)

 

“Fair price” is a cultural issue

Saudi Energy Minister Prince Abdul Aziz bin Salman, says that oil markets should focus on the “enabling price” for oil rather than a “fair price.” Speaking at the Saudi-Russia CEO Forum in Riyadh, the minister said that it was more important to focus on a price that would be sustainable to drive worldwide economic growth: “The ‘fair price’ is a cultural issue, and I have no idea where it should be. The fair price is in the eye of the beholder.” He added: “It is more important to focus on sustainability than a fair price. A sustainable price enables you to provide economic growth and allows budgets to be more transparent and visible.” Speaking of the OPEC+ alliance driven by Saudi Arabia and Russia, he said: “A lot of people focus on maximizing short-term income, but as the enablers in Russia and Saudi Arabia it allows us to focus on the long-term direction for sustainable development.”

Alexander Novak, energy minister of Russia, endorsed the view of his Saudi counterpart. He said that the OPEC+ agreement represented the first time in history that there had been a high level of cooperation between major producers to control oil output. “Russia is ready to cooperate long term in OPEC+. We are going to take that agreement to the next level, which is the highest level,” he said.

Prince Abdul Aziz added that he believed current oil prices would be significantly lower if the OPEC+ agreement was not in effect. OPEC and non-OPEC members would be meeting regularly to monitor output by members. “We are willing to take all measures to maintain balance in the markets,” he said.

Yasir Al-Rumayyan, chairman of Saudi Aramco and governor of the Kingdom’s Public Investment Fund, considered that the oil price could have hit $130 per barrel after the attacks on Abqaiq and Khurais last month, had they not been dealt with so quickly and efficiently: Had Aramco not got its production back, it would have led to a global recession.”

Novak continued, saying that geopolitical risk had an effect on the global energy markets. In a reference to the effects of US sanctions and tariffs on the world economy, he commented: “Geopolitics plays a role. You can see that now we are doing much less investment in the US, and much more in Asia and the Middle East.”

On the same panel, Kirill Dmitriev, CEO of the Russian Direct Investment Fund, downplayed the risks from security concerns in the Middle East, saying: “We saw how quickly Saudi Aramco recovered from the terrible attacks of last month. We believe that Middle Eastern tensions are overblown. What we are witnessing in Saudi Arabia is the fastest transformation of an economy in the history of mankind. The opportunity outweighs the political risk.” (9)

In 2000, PetroAnalysis published a group of articles discussing around the subject of “fair price”. The first, “A fair price”, was from June of that year…

In the subject-matter of petroleum there are a number of examples that demonstrate that that the United States complies with the role of universal legislator. Thus is the world of the Republican Congressman for New York, Benjamin Gilman, president of the Committee on International Relations.

There are four months to the elections in the US. It is normal that the Republicans want to win. They are within their rights to demonstrate the present Administration’s faults. It is time that in the US they understand that the petroleum economy cannot be adjusted, by good means, to their standards of well-being, comfort, and lifestyle. They should recognize: 1) That the petroleum supply that they receive from OPEC is sufficient, permanent, and cheap; 2) That it suffices to cover their consumption, and in addition to have very abundant inventories; 3) That the date of entry into force of the use of a specific type of gasoline is their internal affair with which OPEC has nothing to do. They can blame their refineries for their delays, and also investigate their possible manipulations and fortuitous speculations. The words of President Bill Clinton should have some credibility for them when he affirmed: “There is no economic explanation that can be thought of to explain the hike in prices”, promising a governmental and aggressive investigation with respect to this (AP 06-2000).

The demonization of OPEC does not contribute to the improvement of a world in itself already excessively entangled. As a great petroleum producer, the US knows that: a) exploration is risky and costly; b) increasing capacity is only justifiable economically if there is certain perspective for real demand, not speculative; c) in the OPEC countries, petroleum investment is a state, sovereign, and strategic decision; d) 70% of OPEC’s shut-in capacity is in the Gulf in three countries friendly to the US.

For over 25 years now technology has been reducing the consumption of gasoline per kilometre. Cars are becoming more and more efficient. In parallel, the wages and salaries of the fortunate American workers, in real terms, are improving. In 1970, for the salary of one hour worked in the US nine gallons of gasoline were obtained. For 1979 this reference had fallen to 7.79 gallons. This was the negative effect of the two “oil shocks”. How many gallons are now obtained for the salary of one hour worked? (10)

The second article, “The fair price has its reasons” followed in August…

The existence of OPEC is owed to a Venezuelan initiative whose origins go back to 1949 and were formalized in 1959. In 1960 OPEC was born in Baghdad. I firmly believe that that the important Venezuelan effort was principally due to geological, physical, and natural realities facts and realities that had economic manifestations. I am convinced that today, 40 years after that correct initiative and because of the same realities indicated above, Venezuela continues requiring OPEC to go on functioning in the management of the original 1960 objectives: the obtaining of a just price for petroleum, through the coordination of policies of production and the prorata system [quotas]… this has always been a Venezuelan concept.

 Of the principle of no “more concessions”, rooted in 18th October 1945, it is said that it “gave the concessionaries a great incentive to divert their attention to the Middle East”. In the first place we should remember that by 1945 Iran, Iraq, Bahrain, Saudi Arabia, and Kuwait had granted their respective concessions.

In Venezuela, between 1917 and 1945, the concessionaries had accumulated a production of 3,199,803,000 barrels. The average gravity of that production ranged between 17.8 to 24.0 degrees API. In the Middle East it was 35 degrees API.

In 1945 production in Venezuela registered 886 thousand b/d. During the “Triennium” when Pérez Alfonzo was the minister in charge of petroleum under the Betancourt presidency. At that time it was alleged that “so much apathy was expressed towards the concessionaries”, it could be rather observed that production increased: 1,064 thousand b/d in 1946; 1,191 thousand b/d in 1947; 1,338 thousand b/d in 1948.

In 1949, in the four countries of the Gulf: Iran, Saudi Arabia, Iraq, and Kuwait, the concessionaries produced a total of 1,374 thousand b/d, lightly superior to Venezuela’s production which registered 1,321 thousand b/d. In that year, Venezuela’s proved reserves were 8,233 million barrels and the R/P relation [reserves to production] was 15 years. In the Gulf, there were reserves for 75 years, and they totaled 48,000 million barrels.

The relative disadvantage of Venezuela remained evident when one observes that in 1959 the concessionaries drilled in the country 692 wells, whilst in the four above-mentioned countries in the Gulf taken together 151 were drilled. With what results? The total of producing wells in Venezuela were 10,441 and gave an annual production of 1,011,419 barrels, compared to a total annual production in the whole of the Gulf of 1,677,000 barrels coming from 952 production wells.

This allows one to show that there were considerations of lower costs coming from more favorable geological conditions in the Gulf that determined, now for over half a century that the Gulf Region would be that which counted on the greatest relative advantages.

It is necessary to clarify that out of Venezuela’s proved reserves only some 23 thousand million barrels are light and medium.

It is necessary to show the magnitude of the investments that such production capacity requires and then ask: who would be disposed to invest so much, when prices fall so much? But also one has to ask if the other actors on the supply side would contemplate passively such a bare-faced volumes war? Is it worth gaining so many adversaries, and above all could we win a battle with so many implications?

Horacio Medina explained clearly that if PDVSA had maintained its 1997 potential of 3.8 million b/d “it would have had to incur spending of between 600 to 700 million dollars” (El National 12/02/2000).

In the pre-1998 PDVSA’s Business Plan, the objective was to find light and medium reserves in the order of 40 thousand million barrels. At the moment [1999], the aim is to discover 20 thousand million barrels of these types of crudes (Ludvic Nicklas, PDVSA al Día 30/06/1999). Whilst the aim is reduced in half, the financial requirements are lightly inferior. It is worth pointing out that the cost of discovering a new barrel of reserves is now enormously greater that in the previous plan.

This takes us to the subject of drilled rigs, with all the socio-political sensibility that the question has acquired. Rigs and their costs is another aspect that hurt the so frequently repeated comparative advantages in Venezuela.

When a reporter affirms that: “Venezuela maintained a discrete number of rigs in operation until 1992… it is because who supplied him with the information does not understand the reality or, worse, wishes to manipulate the information (see El Nacional 10/04/2000 p.E/2, Alfredo Carquez Saavedra). Venezuela is competing in the market with its partners in OPEC and as such there must be parameters for comparison.

In 1992 there were 50 active rigs in Venezuela, rising to 59 in 1993; 73 in 1994; 96 in 1995; 106 in 1996; 144 in 1997. In that last year, in the 11 OPEC countries there were 335 rigs, of which 108 were working in Venezuela: 32% of the total. In comparison, in the five Gulf countries – the four Founding Member Countries and the United Arab Emirates, the rig total between 1993 and 1997 evolved as following: 117; 83; 83; 88; 91.

To finalize, one should remember that whilst in the Gulf the proved reserves of light crudes, that total 670 thousand million barrels, are already discovered and ready to be developed. Here we have first of all to find them.

These are some of the arguments that could contribute to understanding why in the year 2000 it is still necessary to support OPEC in order to obtain a fair price for oil in the international market. (11)

 “The ‘fair’ or ‘reasonable’ price” was published in October 2000…

 Before the 2nd OPEC Summit it was not pertinent to discuss this question. Now that the Summit has ended with great success, without including in its Final Declaration any reference to the “price Band”, this subject warrants discussion.

Here the hypothesis is that the world energy industry and the petroleum industry in particular is reworking its costs and prices. This process will rest upon a false premise that will yet again name OPEC as a “Cartel” which is the cause of an “Energy Crisis”, where “prices tripled in a year”.

The cost and price structure of the diverse energy sources require periodic adjustment. In the case of the “alternative sources” it is more urgent to measure this sensibility. This is due to multiple factors related with: the availability of these sources; the degree of progress in their research; the economy of scale of their production; the adequateness of demand for their massive incorporation in the consumer market; the competitiveness of their production costs compared with those of traditional energy sources…

To this, one can add the fact that in the highly developed countries, oil and its industries head the list of the products and activities that are the most regulated. This translates into the need of this industry to deploy difficult and costly efforts and campaigns each time that the government of the respective country imperiously approves measures that would lead to the deregulation of prices, in other words increasing them.

Frequently, the Executive understands this necessity, but cannot act without the Legislative branch giving authorization and recommending such measures. The latter always finds itself in face of the dilemma of how to reconcile the arguments of spokesmen from the oil industry and at the same time placing themselves at the height of their voters who habitually hold on to the tariffs and resist their increase.

In the case of petroleum, it is important to remember that in the main and highly developed countries, in general, two significant facts are brought together: 1) They are world powers or powerful countries with a political-military legacy, or an imperial or at least colonial character, and without question neo-colonial; 2) They are economies that depend notably on petroleum, a product that they import from countries were their colonies or protectorates and/or are still in their areas of influence. This situation inevitably generates the sensation of having a historic and divine right to access this petroleum in the desired quantities in the moments and chosen opportunities, and at the price that the buyer sees fit to pay.

This complex interaction between the petroleum industry, the consuming public, and the Legislature and the Executive in a country such as the United States, where in addition certain lobbies play notable role, is important to take into account at the hour of evaluating situations, and most so when there are only a few weeks to the presidential elections.

The previous considerations owe their pertinence to the fact that we fully comprehend the similarity to each other of two independent processes: a) generated in the OPEC and non OPEC exporting countries, oriented since 1998 to recoup the very deteriorated oil price; and b) dictated by the situation of the American petroleum industry that urgently requires that the US Congress authorizes the freeing of gasoline and natural gas prices; that exploration permits are granted in areas that until now have been vetoed for environmental reasons; and that refiners have impositive privileges.

President Clinton, on the eve of the OPEC Summit, publicly considered that the price range suggested by OPEC was “reasonable”. There is nothing bad in having a coincidence between the producer and the buyer. This is desirable, although the “just” price is still to be defined. (12)

 

Now to the present – API: NOPEC Act will prejudice US oil industry

Most people see very complex issues just in black and white and tend to take a simplistic position with regard to beliefs and ideology. Whole generations can live with the consequences of such wrong conclusions, and this fact can easily lead to consequential political and even military decisions.

The following text from Mike Sommers, president of the American Petroleum Institute is concise and to the point and has the merit of explaining to those people without a deep understanding of both the oil industry and business just what NOPEC would imply once approved as an historic act.

Patriotism and dogmatism sometimes go hand-in-hand. However, once a bridge has been structurally damaged rebuilding is almost impossible.
“5th February 2019

Dear Chairmen Nadler and Graham and Ranking Members Feinstein and Collins:

The American Petroleum Institute (API) (1) opposes H.R. 948, the No Oil Producing and Exporting Cartels (NOPEC) Act, that is expected to receive a markup in the House Committee on the Judiciary soon, as well as related legislation that may be considered by the Senate. We see this legislation as creating significant detrimental exposure to U.S. diplomatic, military and business interests while having limited impact on the market concerns driving the legislation.

Cartels for any commodity are harmful to consumer interests, and this effort to restrict the market impact of member nations of Organization of Petroleum Exporting Countries (OPEC) is well-intended. However, the legislation threatens serious, unintended consequences for the U.S. natural gas and oil industry and its continued success in eroding OPEC’s negative market impacts. U.S. crude oil production has reached record highs this year, helping to put downward pressure on gasoline prices for U.S. consumers and substantially diminishing the influence of OPEC nations – two of the bills’ primary goals. In several ways, NOPEC legislation jeopardizes U.S. companies’ ability to sustain progress in achieving these objectives.

This legislative effort represents a political act aimed at removing a sovereign nation’s litigation immunity from certain U.S. laws and opens the opportunity for reciprocal or even additional action on the part of those impacted countries. This would clearly have a negative impact on our country’s presence in those countries at all levels, which, given their existing geopolitical importance and capacity for U.S. investment, could create significant unintended consequences.

This potential cost is even more concerning to our members for two other reasons. First, the current Sherman Antitrust Act already covers the commercial activities of nations even for activity that takes place abroad. There is no need to create international concerns for situations already addressed. Second, the apparent focus on the legislation – improper influence on energy markets – has been mitigated significantly in recent years. The success of America’s natural gas and oil industry coupled with continued integrations with our NAFTA partners has significantly increased the energy security and self-sufficiency of the United States. This energy renaissance has made America much less susceptible to efforts that may be undertaken by foreign organizations.

Therefore, legislative efforts that strengthen American energy production would be the best approach to insulate our markets from improper influence, and we would welcome the opportunity to work with you achieve those goals.

Sincerely,

Mike Sommers
President and Chief Executive Officer
American Petroleum Institute

(1) API is a national trade association representing over 625 member companies involved in all aspects of the oil and natural gas industry. API’s members include producers, refiners, suppliers, pipeline operators, and marine transporters, as well as service and supply companies that support all segments of the industry. API member companies are leaders of a technology driven industry that supplies most of America’s energy, supports more than 9.8 million jobs and 8 percent of the U.S. economy, and since 2000 has invested nearly $2 trillion in U.S. capital projects to advance all forms of energy.” (13)

In fact, there is a symbiotic US-OPEC relationship, as PetroAnalysis pointed out in March 2019 as it added some clarifications and emphasis to Mike Sommers’ letter on the NOPEC Act:

“Oil prices have generally been rising this year as OPEC and Russia stick to supply cuts, despite pressure from U.S. President Donald Trump. This is something that is perceived by public opinion as a hostile act and it worries politicians with elections on their minds. The odds were pretty good for anti-OPEC legislation given rising anti-Russian and Saudi Arabia sentiment. But the time to see OPEC, and in particular Saudi Arabia, as an enemy has passed, says Dan K. Eberhart – punishing OPEC would be a huge mistake for the US.

The recently approved bill by the House Judiciary Committee known as NOPEC could have the unintended consequence of higher prices in the long term. And this is official, as stated by Energy Secretary Rick Perry.

On 7th February this committee unanimously passed a bipartisan bill known as the No Oil Producing and Exporting Cartels Act, or NOPEC. The legislation would change US antitrust law to revoke the sovereign immunity that has long protected OPEC members from US lawsuits. It allows the Department of Justice to sue the oil producers group or any of its members on grounds of collusion. Versions of the bill have come up in Congress for the last 20 years. A bill passed in 2008 but President George W. Bush never signed the legislation into law.

The U.S. Energy Secretary Rick Perry said on February 28th:

“We need to be really careful before we pass legislation that may have an impact that goes way past its intended consequences.”

Perry said the bill could reduce supply management by oil producers in global markets, possibly leading to a glut of oil and lower prices. That could have the unintended effect of eventually pushing many producers out of the market, which would send prices back up.

For his part, Eberhart explains apparently complex questions in a very didactic way: For decades OPEC has been an economic bogeyman to the United States, and for much of the time since its founding in 1960 the cartel has deserved that status. Over the past five years however, OPEC has become an integral partner in America’s energy security by regulating the supply of oil and maintaining a generally fair oil price. The symbiotic relationship between Saudi Arabia and America has produced a remarkably balanced oil market and it has also spurred Saudi investments in other sectors of the US economy.

Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates, hold the lowest-cost conventional oil, reserves in the world. The shale sector needs higher prices than the cartel’s leading producers to keep drilling. The break-even point for shale producers is roughly between $30 and $60 a barrel on average, according to industry watchers. Production costs in some Middle Eastern countries are less than $10 a barrel.

If Saudi Arabia, with 268 billion barrels of low-cost reserves, really wanted to bring the shale sector to heel, it could. A price war would no doubt cause pain to those OPEC members with higher production costs than Saudi Arabia, but there is no doubt that Riyadh has the capability.

The price collapse in 2014 drove companies into bankruptcy and cost American jobs, prompted by the anti-market activities of OPEC. This is perhaps a reminder of what happens when the spigots are turned on.

OPEC’s moderating role has allowed the US oil sector to achieve record oil production and has made America a major energy exporter – something that seemed impossible less than a decade ago. More often than not in recent years, the cartel has succeeded in keeping the price of oil just high enough to spur investment in new shale fields, but low enough to keep consumers happy.

Rather than competing with America, though, OPEC led by Saudi Arabia, has been holding back about 1.2 million barrels of production a day from the market, making room for US shale producers to continue to increase output.

The Saudis have effectively subsidized the US oil boom. Any legislator who cannot see that is not paying attention.

Punishing OPEC would be a mistake, no matter how popular it is with voters.

Saudi Arabia remains the world’s only real swing producer. It is capable of adding or subtracting several hundred thousand barrels a day of production in a matter of weeks. With its hands on the taps, Saudi Arabia has considerable power over oil prices, even while the United States has surpassed it as the world’s largest producer thanks to the shale boom.

As Eberhart says, it is time we realize that OPEC is no longer a bogeyman, but an ally with common interests.  (14)

In 1980, “OPEC Instrument of Change” was published. Ian Seymour, the author and OPEC’s biographer used the following quotation to make a parallel with the foundation of OPEC: In the words of the preamble to the As Is Agreement: “Excessive competition has resulted in the tremendous over-production of today, when over the world the shut-in production amounts to approximately 60% of the production actually going into consumption.” (17th September 1928) (15)

We at PetroAnalysis share the vision of the Saudi oil minister when he said that a fair price was in the eyes of the beholder.

References:


1. “OPEC at the Crossroads”. Fadhil J. Al-Chalabi, Pergamon Press 1989.
2. “OPEC: Re-tuned Concepts”. Mazhar Al-Shereidah, PetroAnalysis, 21st October 2019.
3. “World Oil Outlook 2019”. Introductory Words from Sanusi Barkindo, OPEC Secretary General.
4. “OPEC: Re-tuned Concepts”. Mazhar Al-Shereidah, PetroAnalysis, 21st October 2019.
5. “There is a symbiotic US-OPEC relationship”. Petroanalysis, 4th March 2019.
6. “In Riyadh, Putin receives a Czar-like reception”. 15th October 2019.
7. “Russia’s Putin says global oil inventories need cutting to ‘reasonable level”. Reuters, 13th October 2019.
8. “Inventories: An arsenal that “only kills prices”. Mazhar Al-Shereidah, PetroAnalysis, August 1999.
9. “Fair oil price is in the eye of the beholder”. Saudi Energy Minister Prince Abdul Aziz, 15th October 2019.
10. “A Fair price”. Mazhar Al-Shereidah, PetroAnalysis, June 2000.
11. “The fair price has its reasons”. Mazhar Al-Shereidah, PetroAnalysis, August 2000
12. “The Price: ‘fair’ or ‘reasonable”. Mazhar Al-Shereidah, PetroAnalysis, October 2000.
13. “API: NOPEC Act will prejudice US oil industry”. PetroAnalysis, 10th February 2019.
14. “There is a symbiotic US-OPEC relationship”. PetroAnalysis, 4th March 2019.
15. “OPEC Instrument of Change’. Ian Seymour, MacMillan Press, 1980.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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