–Professor Omowumi O. Iledare
1. PREAMBLE
Five countries – Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela – were the founding members of the Organization of the Petroleum Exporting Countries (OPEC), which was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 (OPEC). As of 2022, the organization has thirteen members. OPEC stated mission is to coordinate and unify the petroleum policies of its Member Countries. Thus, OPEC is a permanent inter government organisation formed to coordinate and unify petroleum polices among member countries, to secure fair and stable price for petroleum producers, an efficient economics and regular supply of petroleum to consuming nations and a fair return on capital to the industry investors. It has never been about fixing the oil prices by OPEC but rather to develop strategy to maximize the social benefits and welfare of its citizens using petroleum revenue optimally.
To a large extent, as petroleum evolves as the primary energy driving the global economy, OPEC’s strategy must be dynamic and not static, OPEC accepted its role from being the dominant petroleum supplier in the 1980s and 1990s to its contemporary status from the beginning of Y2K. OPEC settles as the producer of last resort balancing sporadic global demand for petroleum to stabilize crude oil prices. Thus, OPEC, in 2016, under HE Sanusi Barkindo (the Late OPEC Secretary General), being an astute political scientist that he was, established an alliance with the following ten countries, Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russian Federation and South Sudan. Permit me to digress and recognize the legacy of HE Dr. Sanusi Barkindo for putting these countries together, christened as OPEC+. There has been in the past some cooperation among non-OPEC producers with OPEC, even consumer nations have attended OPEC meetings not as adversaries. But never has there been a sustained alliance like OPEC+, which the late SG Barkindo bonded and nurtured. His legacy certainly begins with integrity. To the extent that the formidable alliance of OPEC+ has enlightened the mind of green energy advocates that defunding petroleum resources development is foolhardy, in my opinion, enhances the legacy of late Dr. Barkindo.
* I acknowledge Kaase Gbakon, Emerald Energy Institute, University of Port Harcourt, using the report summarised in this section.
The aim of this edition of my op-ed is to facilitate good understanding of the status, attributes, and the relevance of OPEC in the global desire to transit from fossil-fuel energy—coal, oil and gas–to non-fossil fuels, primarily, renewable energy resources. The specific objectives include using some important indicators to disclose why energy transition advocacy in some parts of the world is gaudier than in the oil and gas producing regions. Could it be because of a legitimate concern bordering on energy security and economic crisis than climate change? Interestingly, the energy crisis consequential to the Russia invasion of Ukraine lends credence to this assertion as reports show that some abandoned fossil fuels power plants are being rekindled in some regions advocating for rapid transition to renewable energy. In addition, the op-ed intends to discuss the role of technology and market fundamentals within the context of backstop fuel pricing principle that OPEC is capable of invoking because of its original intent that may be difficult to explain using the cartelization principle.
2.0. IS OPEC A CARTEL?
According to the Organisation for Economic Cooperation and Development (OECD), cartel may agree on such matter as, prices, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sale agencies and division of profits or combination of the above. Interestingly, in economics there are basically, in a generic sense, two broad types of economic analysis. The first type is categorized as descriptive, and the other is characterized as normative. Hence the mantra, “give me an economist with one hand.” Descriptive analysis, most often, are not conjectural because facts are facts. On the other hand, a normative analysis of facts is riddled with value judgement. Unfortunately, depending on who makes the normative assertion and perpetuate it, the tendency is to take it as descriptive. Certainly, I am not writing this piece to change the mindset of many that have been taught to believe that OPEC is a Cartel. But OPEC is not a Cartel for the following reasons.
First, its members do not allocate market share but allocate oil production to attempt to bring market to equilibrium. To optimize production path for intergenerational equity, OPEC, balances supply and demand as best as practicable, keeping in perspective always, the law of supply and demand. Second, OPEC does not agree on or fix prices like most Cartels do, neither does it dictate global industry output in the real sense of it. OPEC has played its inherited role to balance global demand significantly well by increasing output as it is when the market demands it and decreasing output to avoid market disequilibrium, keeping in perspective future market obligations. Third, OPEC members competes for global oil market shares using the comparative advantage of crude oil quality and sweetness accordingly, neither does the organization dictates international petroleum arrangements to its member countries. There is nothing like sharing windfall profits among its members like most Cartels do and they do not have the ability to dictate prices to earn monopoly profit like most cartels do.
Of course, the insinuations above contrast, arguable so, with what has been taught in Economics 101 in most schools, wherever OPEC is, conveniently, cited as a good example of a Cartel. While this characterization of OPEC as a cartel, is understandable, I venture to say OPEC’s behavior is not a good example of cartelization. OPEC strategy to achieve its stated objectives has been dynamic and not static. OPEC, as an intergovernmental organization, has not done anything over its years of existence, that Texas Road Commission and the International Oil and Gas Companies did not do to influence the supply aspect of the international oil market from 1940s-1970s. From the mid-1940s to 1970s, a group of multinational oil companies, the seven sisters, dominated the global petroleum market, conducting itself by being vertical integrated and used posted pricing mechanism to its utmost advantage.
Thus, as OPEC or OPEC+ attempt to strategically influence the supply aspect of the international oil market just as the Organisation for Economic Cooperation and Development (OECD), the G7 Countries, and the International Energy Agency (IEA) as well as multinational and international firms continue to attempt to influence the demand aspect of international oil market. For example, the multinational oil companies have interests to maximize long term profits and returns on investments. They are mostly vertically integrated and strategically accumulate crude oil reserves through prospecting all over the world. The expectation that minimum finding costs will drift upward are counteracted with natural surprises and intentional investments to advance technology, which tends to lower finding and development costs do put pressure on prices.
Additionally, the net oil importing countries represented mostly by the OECD member countries, the G7 countries, and IEA want easy access to cheap, clean, and secure energy. Policies that promote restricted use of oil reserves increase supply uncertainty and consumption related taxes for conservation purposes send signals to E&P investors and E&P firms to revisit investment strategy. There are also production related taxes or subsidies to promote domestic production put pressure on global supply outlook with environmental policies that are design to limit oil consumption and supply to influence crude oil price dynamics. In fact, the cry for energy transition from fossil fuels to green energy is a form of the diversification of supply sources agenda with significant impact on market response to political uncertainty in the Middle East and disturbances in other petroleum producing regions. The strategic petroleum reserves/inventory as a policy strategy in the US coupled with its energy policy objectives of low economic growth per energy intensity, energy efficiency, cheap and secure energy, and clean environment do have implications on world oil supply outlook and prices.
3.0. OPEC AND THE ENERGY TRANSITION SAGA
The forces shaping the global energy transition path to 2050 and the key parameters surrounding the transition are not deterministic. The key players in the global energy supply dynamics are many with diverse interests and attaining the global transition goals require heterogenous approach rather than homogenous strategy. For example, the energy transition era has not changed OPEC strategic objective, which is to maximize the economic wellbeing of its citizens through optimal petroleum resource development. The petroleum importing countries represented mostly by the G7 Countries or IEA countries consider energy affordability, energy sustainability, and energy security to be paramount to the economic wellbeing of their citizens as well. Thus, one thing held in common among all energy transition stakeholders is enhancing the quality of life of human beings, which petroleum has sustained over the years.
Let me repeat what I have said often. Energy transition is not static neither is it a new mantra. It has been an ongoing phenomenon for ages. The saying commonly credited to Ahmed Yamani, the erstwhile Minister of Petroleum for Saudi Arabia from 1962-1986, to buttress home the point. Yamani at one point in his career state unambiguously, that stone age did not end because of lack of stones and so one can speculate that oil may not end because of physical exhaustion of oil in the reservoirs. Interestingly, the world keeps running into oil and not out of it, making renewable energy more like a backstop fuel to oil than vice versa beyond 2050. Crude oil reserves increased by 26% from 1,300 billion Barrels in 2000 to 1,637 billion barrels in 2010.
Despite rising production worldwide, the estimated crude oil reserves at the beginning the year in 2021 was 1,732 billion barrels. Certainly, and indeed, the world is not running out of oil but into oil. There is, however, the expectations that sometime in the future, crude oil might become the backstop fuel to renewable energy as technology drives down the cost of renewable energy sources. Unfortunately, for this to happen, the rate at which the price of oil rises is key, making the time in the future when there will be an indifference between crude oil and renewables, price wise, highly unpredictable with unintended consequences, if the time is set through ad hoc thinking rather than being strategic.
COVID-19 and the ongoing war between Ukraine and Russia have shown the world, there are serious unintended consequences to events and/or actions. Energy transition without oil in the mix inadvertently puts global energy crisis on the same transition agenda. Luckily, the estimated 6,800 TCF of global natural gas reserves can last 50 years at the current global consumption level. Thus, natural gas fits the gap as a global transition fuel very well as the world seeks after green energy with net zero carbon emission.
For OPEC+ countries, adding crude oil and natural gas to the energy supply mix, offers the optimal path to green energy, perhaps beyond 2050, with minimal global energy and economic catastrophe, which could have been unimaginable except for the current crisis driven by Russia invasion of Ukraine. The global economic structure from east to west and north to south is contemporaneously riddled with economic hardship because of inadequate energy supply. To the extent that the dirty and rejected fossil fuels plants are being resuscitated. Unfortunately, if defunding petroleum resources is encouraged as the preferred optimal pathway to green energy in 2050, then there will be nothing to fall back to under such a defunding scenario. On the other hand, if mix energy supply strategy is adopted as a pragmatic pathway to green energy, renewables become the backstop fuel to crude oil with natural gas as the global transition fuel guaranteeing slow rise in crude oil prices until renewable technology becomes affordable for all. Under this scenario, the OPEC inherited role to balance global demand growth for energy with its abundance productive capacity and reserves mitigates against global energy crisis in case the transition is delayed. That OPEC has the capacity to stand in the gap is not conjectural based on facts.
Table 1 offers some insight on petroleum availability and the energy economy quandary underlying the energy security fears in some part of the world seeking to defund petroleum.
The table summarizes the key indices of Reserves Growth, Reserves Replacement Ratio, Equitable Depletion Index, and Reserves- Production Index. The indices are computed to 2019.
First, recoverable reserves growth represents the annual growth of reserves over a period of time. On an annual basis while recoverable reserves at 2.4 % in OPEC, the growth in non-OPEC is 1.4 % from 1970-2019 and just 0.5 % from 2000-2019. It is therefore understandable for countries where oil reserves growth is declining to be energy security conscious and strategize to add renewable energy resources to their energy portfolios not only because of global climate change but to avert energy and economic crisis in such regions. Second, OPEC replaced reserves produced over the period 1970 – 2019 at an average of 154%, non-OPEC, on average, replaced less than 100 percent of produced reserves during the period. In the more recent years, non-OPEC group replaced barely 50% of produced reserves in comparison to OPEC that replaced about 150% during the period, 2000-19. Replacement ratio offers perspectives on sustainability of petroleum as a primary source of energy to drive an economy in a region. The world can sustain global 2019 production rate based on its proved reserves for the next 50 years, while OPEC can sustain its 2019 production for the next 80+ years.
That non-OPEC producers in OECD are in this energy security dilemma, considering the rate at which the high-cost crude in the region has been depleted, is an indication that shows less degree of reasonability in the non-OPEC countries. One hastens to suggest that such inequitable depletion of petroleum has implications, contemporaneously putting OPEC in the driver’s seat.
4.0. SUMMARY AND CONCLUSIONS
OPEC is a permanent inter government organisation formed to coordinate and unify petroleum polices among members countries, to secure fair and stable price for petroleum producers, an efficient economics and regular supply of petroleum to consuming nations and a fair return on capital to the industry investors. It has never been about fixing the oil prices by OPEC but rather to develop strategy to maximize the social benefits and welfare of its citizens using petroleum revenue optimally. OPEC strategy to achieve its stated objectives has been dynamic and not static. OPEC, as an intergovernmental organization, has not done anything over its years of existence, that Texas Road Commission and the International Oil and Gas Companies did not do to influence the supply aspect of the international oil market from 1940s-1970s.
Energy transition without oil in the mix inadvertently puts global energy crisis on the same transition agenda. COVID-19 and the ongoing war between Ukraine and Russia have shown the world, there are serious unintended consequences to events and/or actions. For OPEC+ countries, adding crude oil and natural gas to the energy supply mix, offers the optimal path to green energy, perhaps beyond 2050, with minimal global energy and economic catastrophe, which could have been unimaginable except for the current crisis driven by Russia invasion of Ukraine.
Unfortunately, if defunding petroleum resources is encouraged as the preferred optimal pathway to green energy in 2050, then there will be nothing to fall back to under such a defunding scenario. On the other hand, if mix energy supply strategy is adopted as a pragmatic pathway to green energy, renewables become the backstop fuel to crude oil with natural gas as the global transition fuel guaranteeing slow rise in crude oil prices until renewable technology becomes affordable for all.
Finally, managing into the energy future without oil, as the world races towards green energy, beyond 2050 is bound to be suboptimal and such energy transition pathway may result in an unprecedented energy crisis worldwide.