Oil’s last hurrah

| December 9, 2021

As the world grapples with global warming and seeks to reduce emissions to net zero over the next three decades, oil-producing states are set to maximise earnings from their black gold before it loses its marketability to clean sources of energy. Oil and gas prices can be expected to soar worldwide in the years ahead, with little relief in sight unless the world economy experiences a dramatic downturn that causes a significant drop in oil consumption.

Leading the headwind is the Organization of the Petroleum Exporting Countries, plus Russia. Established in 1960, OPEC became a formidable cartel in little more than a decade. It wrested control of supply and prices of oil from the Western international oil companies. OPEC reached its zenith in the early 1970s when its 14 members broke the companies’ monopoly by determining the amount of oil production and prices commensurate to demand in the international market. Its Middle Eastern producers and Venezuela quadrupled their incomes, constituting a new bloc of rich actors in world politics.

Since then, OPEC’s fortunes have been affected by internal geopolitical and ideological divisions, rivalries and conflicts as well as supply and demand factors. The price of crude oil has fluctuated from US$20 per barrel in the mid-1970s to some US$120 in the early 2010s, dropping dramatically in the wake of the savagery of the Covid-19 pandemic.

However, in spite of its internal differences, three factors more than any others are now at work in strengthening OPEC’s position as a cartel and putting upward pressure on oil prices. The first is the economic rebound in industrialised countries as they have decided to come to terms with Covid-19 and its different strains.

The second is the changing world geostrategic situation whereby Russia—a non-OPEC member—has found it financially and politically expedient to coordinate with OPEC and more specifically with its largest producer, Saudi Arabia, which enjoys a capacity to influence OPEC’s politics and world market by increasing or decreasing its production.

The third factor is climate change and the accelerated search for renewable and clean sources of energy, as embodied in the declaration of last month’s Glasgow climate summit and prior to that in the largely defunct 2015 Paris agreement.

Of the three, world economic recovery shouldn’t logically entail dramatic oil price rises, which consumers encounter today in Australia and elsewhere. The recovery hasn’t reached pre-pandemic levels and, even if it does, it can’t justify soaring prices. The only time in the past decade when there was a dramatic hike in prices was in 2012, reaching US$110 per barrel, but the world economy was also very robust then. Although the price declined in the subsequent few years, in 2018 it hovered around US$80 per barrel. Yet motorists still didn’t pay as much at the bowser as they’re paying today.

The answer seems to be embedded in the other two factors. Lately Saudi Arabia and Russia have found it expedient to have a modus vivendi not to increase production to a level that could alleviate supply and delivery difficulties caused by the effects of the pandemic. Since 2020, Riyadh and Moscow have engaged in a mutual revenue-raising and geopolitically beneficial interplay.

Saudi Arabia has been keen not only to make up for revenue losses during the pandemic lockdowns and economic downturn, but also to disadvantage Iran, which has the potential to be the second largest producer within OPEC but is suffering under severe US sanctions. In this context, Riyadh has also remained opposed to a restoration of the July 2015 Iran nuclear agreement that could result in a lifting of sanctions against Iran.

Sharing Saudi Arabia’s earnest desire for more revenue, Russia has decided to make use of its hydrocarbon resources in a wider geopolitical game with Europe and the US. President Vladimir Putin wants to punish the European Union and through it the US for their variety of sanctions over Russia’s annexation of Crimea and aggressive attitude towards Ukraine. The Riyadh–Moscow favourable interplay, from which other OPEC members have also benefited, comes at a time when all oil-producing states are nervous about the consequences of the global push for clean sources of energy.

They are cognisant of the fact that the future belongs to alternative sources of energy, prompting them to take advantage of the window of opportunity open to them to accelerate their income. This income will then enable them to invest in alternative energy sources so that they can remain influential players in the post-hydrocarbon world market. Saudi Arabia has already unfolded notable initiatives in this respect, and its oil-rich Arab allies seem to be on a similar path. Russia has moved into this space as well.

The age of the oil price dropping to US$30 per barrel, as it did in 2016, has gone. Climate change has injected new energy into OPEC plus Russia, which can be expected to play for higher prices for the foreseeable future. That’s not good news for a post-pandemic world recovery.

This article was published by The Strategist.

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