Opec: Cartel’s power set to increase as stocks decline

http://www.ft.com/cms/s/0/6d128418-e2e8-11df-9735-00144feabdc0.html

By David Blair

Published: October 29 2010 16:38 | Last updated: October 29 2010 16:38

Opec’s gleaming new headquarters in Vienna strives to project an image of confidence in the future and benign concern for the health of the world economy.

“An efficient and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital,” reads the organisation’s mission statement.

Five decades after it was founded in Baghdad in September 1960, Opec’s unmistakable self-confidence is largely justified. The cartel demonstrated its power over the oil market in December 2008 by deciding to cut production by 4.2m b/d, causing prices to double from a low of just over $30 a barrel.

They eventually reached their present level of about $80, which most Opec member states regard as ideal.

The decision, announced at a meeting of oil ministers in Algeria, was described as the “best ever taken” by Abdalla El-Badri, Opec’s secretary-general. It might also be a harbinger of the organisation’s power in the next 50 years.

The signs are that Opec will assume a steadily greater importance in the coming decades, strengthening its position as the oil market’s swing producer with a unique ability to influence the price.

Two crucial asymmetries help explain this. Together, Opec’s 12 members produce about a third of the world’s daily oil output: 29.1m barrels out of a total of 86m. But their share of global oil reserves is far higher: Opec countries possess almost 80 per cent of the total – about 1,000bn barrels – compared with 273bn barrels in the rest of the world.

While Opec members pump a smaller share of the world’s oil than might be thought, their control of so much of the global stock is unrivalled.

Second, Opec members have the spare capacity to vary production levels and shape the market. Saudi Arabia, the cartel’s de facto leader, could pump about 12.5m b/d; the kingdom, however, chooses to withhold more than 4m barrels and produce a relatively modest 8.25m b/d. In this way, Saudi Arabia is able to guide oil prices towards its preferred level, which Ali Naimi, the oil minister, defines as $70-$80 per barrel.

As non-Opec producers steadily deplete their own reserves over the next 50 years, the cartel’s power over prices is likely to grow. Its members will probably account for a sharply rising share of the world’s oil output.

“Opec”, says Adnan Shihab-Eldin, the cartel’s head of research, “will increasingly be called upon to supply the incremental barrel”.

By 2025, Opec’s share of daily output will probably have grown to 50 per cent. Total oil production by non-members, which now runs at 57m b/d, has probably reached a plateau, according to Opec’s research division, with the additional barrels extracted from frontier territories, such as the Brazilian or west African coasts, mirrored by the decline of mature fields in the US or the North Sea.

All this means that Opec can probably look forward to rising influence in the decades ahead. But this trajectory is by no means assured. Several factors could spoil the party.

The first is uncertainty over demand, particularly in the light of policies to prevent climate change. At present, oil consumption is broadly flat in the mature markets of Europe and North America, while the developing economies of Asia and the Middle East account for the bulk of demand growth.

If, however, the drive to combat climate change were to produce genuinely global moves to reduce dependence on fossil fuels, Opec’s assumption that demand will continue to rise in developing countries may prove misplaced.

The cartel prospers in a world where the energy mix is dominated by fossil fuels; a radical change in this balance would prove fatal for it. Any such fundamental transformation is almost inconceivable in the next decade or two. But, on a 50 year view, things are less certain.

The second question mark is over Opec’s ability to maintain its own cohesion. The 12 member states include countries as diverse as Ecuador, Angola and Iran; they have little in common beyond their possession of large oil reserves and their status as developing nations.

Already, members have a record of largely ignoring the cartel’s agreed production cuts.

Mr Badri might hail the virtues of the Algeria decision, but his own figures show that member countries are complying with only 61 per cent of the output reduction. Independent estimates, meanwhile, put the compliance figure at closer to 50 per cent.

The worst offenders are believed to be Venezuela, Nigeria and Angola, whose production policies appear to bear minimal relation to Opec quotas.

Mr Badri acknowledges that Opec must “work harder” on the issue of compliance. “A decision that has been taken; we have to adhere to it. If we want to change it, we have to change it together. If we don’t want it, we don’t decide it,” he says.

But Mr Badri, a former Libyan oil minister and head of the country’s national oil company, points to the 1,000bn barrels held by Opec members in their domestic reserves and voices optimism for the organisation’s next 50 years.

“We can supply the world with oil for the foreseeable future,” he says. “I assure you, when difficult times come, Opec will stand and take a decision to restabilise the market.”