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OECD secretary-general explains global cost of the Russian oil embargo
The year before Covid-19 hit, the United States became a net exporter of energy for the first time since 1952, sending a strong message to the rest of the world: The country would not be beholden to foreign oil producers.
But with demand for crude surging as the impact of the pandemic fades, that no longer feels like the case.
OPEC+, which groups the Organization of the Petroleum Exporting Countries and allies like Russia, is once again flexing its muscle. The group’s refusal to accede to US President Joe Biden’s calls to boost output — a move that would have helped ease upward pressure on gasoline prices — precipitated the decision by the United States and other major energy-consuming nations last week to tap strategic oil reserves.
The episode displayed the group’s market power, even as the energy transition gathers pace. Demand for oil could peak soon if countries meet their net-zero emissions targets, but OPEC producers and Russia are quick to note it’s not going away entirely. Under climate pledges made throughearly October, the world is still expected to need 75 million barrels of oil per day by 2050, according to the International Energy Agency.
“This is definitely a period where OPEC and the wider OPEC+ group is finding it has a lot of influence over oil markets,” said Richard Bronze, head of geopolitics at the consultancy Energy Aspects.
When it comes to oil price dynamics, it’s hard to predict the future. Political or weather events can trigger a boom or fuel a huge drop. The pandemic adds to the uncertainty, especially as scientists race to assess the Omicron variant. Witness the more than 20% price crash in recent days that has taken US oil futures back to levels last seen in August.
Omicron may put OPEC and Russia on the back foot again. And analysts believe that their sway could recede further over the next year as US producers regain ground. But over time, their strength could increase — especially as the climate crisis prompts others to trim output, either because of pressure from financial backers or in anticipation of a decline in demand.
“The only producers that have put in the investment that’s needed [to sustain long-term production] are Saudi Aramco and Adnoc,” said Ellen Wald, author of the book “Saudi, Inc.,” referring to state oil firms in Saudi Arabia and the United Arab Emirates. “That shifts the balance over to OPEC.”
OPEC’s moment
OPEC+ had another opportunity to demonstrate its clout on Thursday when it announced its latest policy decision.It decided to proceed with caution, sticking to a long-term plan to gradually add back production cut at the beginning of the pandemic.
Brent crude futures, the global benchmark, and US oil both dropped after the announcement. After a sharp rally earlier this year, oil prices have pulled back more than 20% since late October.
The decision by Saudi Arabia, Russia and others was closely scrutinized in part because oil production in the United States has yet to recover to pre-pandemic levels.
Over much of the past decade, when oil prices shot up, US producers rushed to ramp up output, taking on debt to pump as much crude as possible. That’s not happening this time around, as oil companies prioritize returning money to shareholders and watch their bottom lines.
“There’s not that capital available that there was three, four or five years ago to go out and drill and grow,” said Anish Kapadia, head of energy at Palissy Advisors.
That’s giving OPEC greater leverage over prices. It needs them to remain elevated, but not climb so high that US producers feel they have no choice but to boost production again.
The group only has so much control over supply and demand.Should the Omicron variant seriously dent economic activity, prices could plunge no matter what OPEC does. The full impact of the announcement by the United States, China, Japan, India, South Korea and the United Kingdom to put millions of barrels of oil on the market also remains to be seen. And some analysts believe that while OPEC countries have plenty of oil in the ground, they don’t have the resources to quickly extract it.
Yet until production in the United States recovers, OPEC’s policies will remain a crucial force driving markets. And for now, the group appears committed to erring on the side of caution, rather than risk member nations who depend on oil revenue having to sell into a glut.
Lasting influence?
US production is expected to snap back next year. But the unusual lag is generating questions about whether a deeper, more permanent shift is at play.
“If you step back, 80% of the growth of oil production in the 2010s came from the United States,” said Nikos Tsafos, an energy expert at the Center for Strategic and International Studies. “If that machine is broken, and we’re not going to get a lot more oil out of the United States, our whole understanding of what the oil market looks like in the 2020s needs to change.”
Pressure on big oil and gas companies in Europe and the United States to rethink their strategies in light of the climate crisis is having an impact. In a report published earlier this year, the IEA found that major oil and gas companies are holding aggregate oil and gas spending flat in 2021. Their share of industry-wide spending on exploration and production is now at 25%, compared to nearly 40% in the mid-2010s.
According to the American Petroleum Institute, the industry spent just $37.4 billion on capital projects in the second quarter of 2021, compared to $68.7 billion during the same period in 2019. It was the lowest spending on record for any quarter since 2008.
Players like Saudi Aramco, meanwhile, are working to boost their production capacity, with an eye on supplying oil to markets as long as there’s demand.
“They still see huge demand in the developing world, and they still see huge demand for oil products,” said Wald, a nonresident senior fellow with the Atlantic Council Global Energy Center, noting the wide range of items that use petroleum as a component.
That underinvestment outside of OPEC, along with newfound financial discipline among smaller shale producers, could have lasting consequences, she continued.
Data from the IEA shows that OPEC and Russia’s share of oil production could climb from 47% in 2020 to 49% in 2030 if countries meet all of their announced climate pledges in full. By 2050, OPEC and Russia are projected to make up 58% of output.
“Things may turn around, but there’s such a deficit of investment, it will take time to come back from that,” Wald said. “It does put OPEC and Saudi Arabia in a good position.”
As always, though, the group’s power is dependent on politics. Much could come down to whether its members can continue to get along and maintain a cohesive game plan. Breaks between Saudi Arabia and Russia in March 2020 caused prices to collapse.
“[OPEC+] needs to act collectively,” Bronze said. “As soon as you get divisions or disagreements, those can really undermine the group’s ability to operate and stick to decisions.”