http://www.telegraph.co.uk/earth/energy/oil/11258456/Great-news-low-oil-prices-are-destroying-Opecs-power.htmlGreat news - low oil prices are destroying Opec's power
The energy markets are slowly being prised from the grip of this damaging cartel
By Jeremy Warner
6:05AM GMT 28 Nov 2014
American presidents come and go. Prime ministers are constantly changing. Many European finance ministers are lucky if they last even a year. At G20 meetings, there is little point in striking up new friendships and allegiances. As likely as not, they won’t be there next time.
Yet amid this ever-shifting international elite, there is one constant – the abiding presence of the Saudi Arabian oil minister, Ali al-Naimi. The diminutive Mr Naimi has been in the job for nearly 20 years now, and despite his age – he celebrates his 80th birthday next year – he shows few signs of leaving.
In any other walk of life, this would be hard to understand. The cartel of oil-rich nations that he dominates, the Organisation of Petroleum Exporting Countries (Opec), is not merely a pale shadow of what it was when Sheikh Yamani ran the show, but by the look of it is in complete disarray.
Since the mid-1990s, when Mr Naimi took up his post, Opec’s share of the global oil market has plummeted from a commanding 50 per cent plus to less than 30 per cent. To cap it all, its members seem to have lost all control of the oil price, which since June has fallen by more than a third. At a meeting in Vienna yesterday, Opec was unable to agree production cuts to halt the slide – or rather, Saudi Arabia and other gulf states refused to go along with them.
As a symbol of continuity in an uncertain world – as well as a favourite of the Saudi royal family – Mr Naimi may or may not have some merit. Even so, many oil producers will be asking, why is he still there? The purpose of Opec is to manipulate the oil price to maximise returns for its members. The Saudi oil minister is not obviously succeeding in this endeavour. There was visible anger from poorer members of Opec, such as Venezuela, at yesterday's meeting, who increasingly question its purpose. What's the point in being bound by quotas if they cannot support the price? So what is Mr Naimi playing at?
For big oil-consuming regions – America, Europe and Asia – the collapse in the price is a boon, which ought to provide a substantial stimulus to economies becalmed by deficient demand. In both Britain and the US, there is already evidence that lower fuel prices are helping to boost consumer spending and confidence.
Yet for many oil exporters, it is a disaster. Ever since the Arab Spring, there has been an unwritten understanding that the price required to keep the natives quiescent is $100 a barrel or higher. The benchmark for Brent crude is now down to $71, with every possibility, given the abundant supply, of it going as low as $50.
For a low-cost producer like Saudi Arabia, with its huge financial cushion of overseas assets to fall back on, this may just about be tolerable, at least for a while. For many others, it’s a living nightmare with massive domestic and geopolitical implications.
We shouldn’t mourn that much. Ever since its foundation back in the Sixties, Opec has been a brutally destructive force on the global stage, whose malign grip on oil prices has helped sustain some particularly unsavoury regimes. The best analogy I can think of for its influence is that it is a bit like having your interest rate policy set by a small caucus of self-centred outsiders, who pay little or no regard to wider economic needs.
Opec would of course argue that the whole purpose of its production quotas is to balance supply and demand, so as to mitigate the cyclical consequences of extreme swings in the oil price. In so doing, the organisation supports development of reserves for the long term, thereby providing an important, global service. Yet if this is the objective, it has repeatedly failed. Time and again, the world economy has been destabilised by Opec’s greed.
This monstrous cartel, an organisation which in any other line of business would be hunted down and prosecuted, may now be about to get its comeuppance. By ensuring that the price stayed above $100 a barrel for much of the past six or seven years, Opec has sowed the seeds of its own destruction. Those sky-high oil prices are one of the reasons why the global economy has been struggling. There is even quite a bit of evidence to suggest they were a key factor in tipping the world into crisis in the first place.
The effect on the oil market has been both to depress demand, while at the same time encouraging the development of other, non-Opec sources of production – the most striking example of which is American shale. There is a sense in which Opec's hubris has created its own nemesis. This is not unlike what happened after the oil price shocks of the Seventies, when by hiking up the price, Opec similarly pole-axed demand and spawned a worldwide search for alternative sources of energy supply, including Britain’s North Sea. Opec lost market share on a hitherto unprecedented scale amid the consequent glut.
If there is method in Mr Naimi’s apparent madness this time around, it is presumably to prevent a repeat of that episode. High oil price targets have been sacrificed in favour of defending market share – which would obviously be further damaged if cuts in Opec quotas were to be imposed. Compliance and discipline within Opec is in any case now so lax that there was no certainty production cuts would hold. By allowing the price to fall, Saudi hopes to kill off the competition of American shale. Once this irritant has been removed, Mr Naimi hopes to restore the power of his monopoly. It's quite a gamble, and one certain to create havoc among oil producing nations as long as it's played out.
There is much speculation, of course, about Riyadh’s wider geopolitical motives. Relations with Washington have been distinctly cool since the US refused to intervene in Syria and reopened talks with Iran. A low oil price plainly helps Saudi Arabia’s goal of undermining American shale – but the US may not object so much if driving down the price serves the parallel purpose of sticking it to the Russians, who are already being severely impacted by the emerging oil surplus. Making oil more affordable also curries favour with the Chinese.
If Mr Naimi has a strategy at all, it’s this – capturing the growth markets of Asia for the long term, and attempting to undermine the unexpected success of higher-cost American shale oil. So for the Saudis at least, there is a convenient confluence of reasons for actually welcoming a temporary reduction in the price. That it might restore the world economy to decent levels of growth would be the icing on the cake.
Yet if the Saudis are banking on oil quickly rising back to former levels – once the upstart competition from shale and other marginal sources of supply has been eliminated – they may have to think again. With the US determined to achieve its long-cherished goal of energy self-sufficiency, shale won’t so easily be stopped. Some of it is admittedly unviable at these prices, but there is already a lot of sunk investment and there are still parts of the US where shale development remains economic, even at such low prices. For the great bulk of OECD countries, oil use has in any case been on a strongly declining trend for many years now. High prices have incentivised lower usage. Climate-change targets, and the growing competitiveness of alternative sources of energy such as solar, will in time add to this dynamic.
Admittedly, some big growth markets remain – notably China, where new car sales are running at around 1.5 million a month. There’s life in the black stuff yet. Even so, the once-fashionable idea of “peak oil” – that the petroleum would run out before we’d found alternatives, or at least that the low-cost supply was close to exhaustion, leaving the world dependent on much more expensive sources – looks ever more misplaced.
I’m not saying that the oil price will never again get much above $80 a barrel. Inevitably it will. There are, no doubt, at least another couple of cycles left in the oil market yet. Hydrocarbon consumption still accounts for around a tenth of global GDP, and much of the rest of it owes its existence to the transformative power of oil. It will be many decades before the world frees itself of this dependence.
All the same, oil is steadily losing its power to shock – and so are Opec and its Bedouin masters. This is an overwhelmingly positive development, and in a gloom-ridden world, a matter for some celebration.
