OPINION: Crude Truth | In Defense of OPEC by Mahin Siddiqui
IndraStra Global

OPINION: Crude Truth | In Defense of OPEC by Mahin Siddiqui

By Mahin Siddiqui

On November 27th 2014 the collective energy industry held its breath waiting for OPEC’s decision. And then Ali Al Naimi’s voice, “We won’t cut", rang across the meeting room in Vienna, and echoed right till the Alaskan North Slope. OPEC crude standing at above $80 per barrel promptly crashed to below $70 per barrel next day, and the crowd went wild.

Rapidly, OPEC and in particular Saudi fell out of popular and media favor as shale quickly became the bereft child of the cyclical industry, left to suffer by the price drop.

Quick to blame OPEC as the swing producer, industry conveniently forgets that the organisation holds no more than 40% in the crude market share. However neither OPEC nor the Kingdom of Saudi Arabia have forgotten history. On April 8th 2015 in a speech at Riyadh, Al Naimi was equally swift to remind of the 1980s glut when OPEC did comply with market whims and cut back on production; the Kingdom’s production dwindled down from 10 mmbpd to 3 mmbpd while global prices fell from over $40 per barrel to $10 per barrel. Their unwillingness to repeat history has made greater OPEC and Saudi Arabia cautious; while they are happy to cut production to restore a high priced oil order, they will only do so under a transparent and accountable mechanism. UAE and Kuwait have gone so far to suggest that shale producers – with greater market share - take the lead in cutting down production.

Executive portrait of Schlumberger CEO Paal Kibsgaard
at the Schlumberger office in Houston, Texas
on January 3, 2013. .  © 2013 Robert Seale
Whispers of suffering economies and lost revenues are loud and clear, but shale and conventional oil are giving producers on either ends different economic impacts. According to Paal Kibsgaard, CEO of Schlumberger break-even price for tight oil plays is about $75 per barrel; by comparison Middle East and OPEC break-even for conventional light oil are less than $10 per barrel. In its April issue Bloomberg put out a brilliant cover, with a smug Al Naimi’s spectacles glaring Crude Gambit – and this is exactly what OPEC has played sacrificing their cent percent profits for the greater good. While OPEC and big producers are facing losses in their profits, they are simply unwilling to correct the market and disinterested in creating a cushion for expensive producers. In CEO IHS Daniel Yergin’s words, they quit and said let the market correct the market.

Many have different opinions on OPEC’s disinterest in oil correction. Greater interest lies in driving shale producers out of the market and in the process gain political leverage over Iran and Russia by crippling their economies. I argue that firstly, Al Naimi was the first to welcome shale supply in the market in 2008, it disproved the myth of peak oil; and secondly, even as OPEC production stays stable, shale production is historically high, and OPEC is simply guarding its own share in oil markets, which is what businesses do. And if during that process it helps to give them political leverage, all the more value and motivation for OPEC’s strategy.

A December 2014 Cover Page
Already reports of stabilizing oil prices are underway with OPEC basket trading currently at around $62 per barrel, and analysts of a reactive market are predicting early wins for OPEC.

Just to reiterate the organisation is definitively interested in a stable market and higher oil price; and shale producers would like to suffer less. But in haste to blame an inherently evil OPEC, the real reason for a supply glut is overlooked.

In the $100 oil era, consuming economies in Asia, reliant on expensive oil, were forced to diversify their energy reliance in the name of environment, energy security and economically sustainable supply. $100 oil was highly unfeasible for poor countries like India, Pakistan or even China. Come a supply glut in the market, individual consumers elated at receding costs of oil are rushing to buy diesel cars and petrol vehicles. Countries are able to use fuel oil to power their electric stations and renewable has taken a backseat.

Simply put, the downward crude shock is beneficial to OPEC. As it cripples its rival economies, strikes the shale market and maintains it market share, it also performs the ultimate the goal, which is to ensure continued long term reliance on fossil fuel. According to the Financial Times, number of active drilling rigs in US is now low as individual producers cut back their expenditures. The EIA predicts that the US shale boom is at its peak. Meanwhile Kuwait has made a discovery of three new oil fields with immense recoverable reserves, and Saudi is investing in shale and carbonate reservoirs.

While current media and public creates conspiracy theories arguing over why Saudi or total OPEC does not cut its production, debate on how OPEC has lost its centre stage position in the market, somewhere all producing countries have achieved their goal. OPEC will always be relevant because with cheap fossil fuel, they have just prolonged the age of oil.