The Collapse of OPEC Power

The Collapse of OPEC Power

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By Peter C Glover and Michael J. Economides

Since its inception in 1960, OPEC has never been shy in flexing its energy-fuelled power over the West. But those days are gone. And it’s not just the US and Israeli shale gas and oil revolution which threatens OPEC decline. OPEC is already grappling with a whole bunch of serious energy problems that are colluding to hasten its demise.

Let’s just focus on the OPEC kingpin and world’s leading oil producer, Saudi Arabia. Even as the Saudis and other OPEC leaders have played down the nascent impact of US shale development on global production (especially America’s growing self-sufficiency), the signs are that the Saudis are increasingly desperate to keep their world no 1 ranking in oil production. But the runes are not falling their way.

In the last decade OPEC has seen a net increase in its total oil production. In 2002 it was 28.97 million barrels per day (mbpd). By 2012 that had risen to 36.64 mbpd. This year OPEC production had been expected to remain stagnant. But a Dow Jones Newswire survey in October 2012 revealed that OPEC production had actually fallen to 31.32 mbpd, and by January 2013 was down to 30.34 mbpd. While the Energy Information Administration (EIA) expects production to rise in the coming year, it anticipates the level will remain below that reported in 2011 and well below the high of 2002.

But the troubles for the Saudis are only just starting. Chief among them: the meteoric rise of US production and the boom in associated technological developments driving it. This includes hydraulic fracturing ‘fracking’ and other enhanced oil recovery techniques (EOR) making more and more formerly non-recoverable oil accessible. As if that weren’t enough, domestic oil demand in Saudi continues to rise threatening Saudi export revenues.

According to a Citigroup report in February 2013, the record surge in US oil production – in the first ten months of 2012 US domestic production met 84 percent of its energy needs – now threatens the very existence of OPEC.  The EIA reports that US oil production expanded by a record 790,000 barrels a day last year. According to the Citigroup report, by the middle of 2013 the US Gulf Coast will be supplied with oil from much closer to home – from North Dakota and Texas, displacing imports from Saudi, Iraq and Kuwait. OPEC itself has been forced to downgrade its economic prospects. In OPEC’s World Oil Outlook anticipates a decline in global demand for its oil to 2016 with production falling to 29.7 mpbd. That’s a drop of 1.6 mbpd from the forecast just a year ago. For the moment, much of the consequent fall in demand from the West is likely to be offset by a rise in demand from Asia, especially China and India. But the real fear for the Saudis and for OPEC’s members generally is what would happen to OPEC once US shale fracking technologies are exported worldwide? China’s domestic shale gas and oil reserves may add significantly to the country’s needs.  So why import from the Middle East when a bonanza of oil and gas is right under your own feet?  All the signs are that both China and India intend to invest heavily in shale development at home.

Last year saw the Saudis rake in a cool £347 billion from oil exports. But like all economically developing OPEC states, Saudi is seeing a steady increase year on year in domestic energy demand – last year by 4 percent. At this pace Saudi will be consuming over 3 mbpd of its own production; production revenue from potential exports that it can ill-afford to lose.  More broadly, Exxon Mobil’s energy outlook to 2040 reveals oil consumption in the Middle East generally will rise by 49 percent and natural gas consumption by a massive 97 percent, with the resultant impact on oil export revenues. In addition, Saudi has already committed itself to spending half a trillion dollars worth of oil export cash on domestic social programs, which it may soon find difficult to fund.

These issues are precisely why we have been hearing so much of late about the Saudi Government’s attempts to diversify its energy operations, including the potential exploitation of its own shale gas and oil prospects. But one has to wonder where, in this desert kingdom, it expects to find the enormous quantities of water necessary to the fracking process. The annual water requirement for fracking operations in the West is somewhere between 70 billion and 140 billion gallons. The Saudis simply don’t have the water for that scale of energy production. Saudi has also committed to gambling $100 billion of its oil riches on a 40 gigawatt solar energy project.  And in February this year, the Riyadh government also turned to Japan for help in developing nuclear technology that could enable it to build 60 new nuclear power plants. However, the simple fact is that all of this is unlikely to offset the potential losses expected to be suffered by depleting oil reserves and declining oil export revenues.  One recent report has suggested that such is the plight of the Saudis, the country could well be a net importer of oil within 20 years.

Plainly, the days when OPEC could hold the West to political ransom – as it did when it ordered an oil embargo after the US supplied Israel with arms during the 1973 Arab-Israeli War – are over. The tables have indeed been turned on the Saudis and on OPEC due in no small part to the development of the fracking (hydraulic fracturing) technique. Fracking may have signalled the collapse of its power in the West, OPECs inherent tyrannical despotism and political hubris will only serve to hasten its global demise.

 

We will look at the impact of the collapse of OPEC power on the broader geopolitics of the region in part three of this trilogy. Part 1 ‘The Rise to Energy Superpower Under Way’ can be viewed here.

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