Opec still in the lead to control oil prices
December 06 2017 12:08 AM
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Opec’s obituary has been written many times, as spurts of new technologies and petroleum discoveries rewrite the global energy trade. But the Organisation of Petroleum Exporting Countries has just as often defied its critics this time too.
Opec and its allies outside the group last week agreed to maintain oil production cuts until the end of 2018. The decision showed the strength of the alliance with Russia, and confounded Wall Street analysts who’d predicted Moscow would be reluctant to keep going. The deal was also beefed up with the inclusion of Nigeria and Libya, two Opec members originally exempted from the production curbs.
For sure, Opec, the oil producer’s alliance formed in 1960, is not what it used to be when it comes to calling the shots in the oil market. But the alliance that pumps 40% of the world’s oil is still in the lead to manage prices. The group has now expanded its powers by building an alliance with another 11 non-members that joined its latest cuts.
By keeping the 1.8mn bpd of cuts in place for a further nine months, the oil producers aim to return stockpiles to their five-year average without overheating the market and eliciting a new flood of shale oil.
What’s more, the world’s appetite for oil isn’t going away. Opec’s in-house forecast is that demand for its oil is expected to increase by almost 400,000 bpd in 2018 from October’s 33.4mn bpd. For 2017, demand will go up by 200,000 bpd.
Longer term, demand is projected to reach 111.1mn bpd by 2040, or about the same as Opec has projected for several years. Opec’s heartland in the Middle East still holds the world’s most profitable fields to pump at about a third of the cost of US shale.
Yet big many questions have been left unanswered. How will the deal be unwound? Along with the growing global economy, the production cuts have helped push up oil prices. How to keep prices high without stimulating further growth in US shale oil production?
The US shale boom has brought the country closer to energy self-sufficiency than at any time since the 1980s. In a sign of the challenges Opec is facing, the US government last week reported a large increase in domestic production in September, bringing the total to 9.48mn bpd, the fourth highest monthly level since the early 1970s.
The growing popularity of electric cars and renewable energy is also likely to perpetuate Opec’s migraine.
Oil, for sure, is much more than a fuel. It is a force even bigger than its trillion dollar market; a fact explained beyond doubt by the impact of consistently lower oil prices on the Middle East as well as the whole world.
There are, of course, gainers and losers from the prolonged decline in oil prices. But the world is in need of a stable oil market with price equilibrium. The longer it takes to arrive at price levels acceptable to producers and consumers alike, the harder the hit will be on the global economic balance.



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