The grip of OPEC “oiligopolists” weakens as Saudi strategy shifts

The grip of OPEC “oiligopolists” weakens as Saudi strategy shifts

Oil markets appear to be moving into a new paradigm. It seems probable that the market may decide the price rather than strong political forces of the past. Competition from U.S. shale hydrocarbon production, and the Saudi Kingdom’s Vision 2030 plan of economic diversification are creating new dynamics that will play out over years.

The Organization of Petroleum Exporting Countries (OPEC) has been acting as a cartel, wielding its influence over oil prices for decades. OPEC members, like Saudi Arabia, Iraq, Iran, United Arab Emirates, and Kuwait control roughly one-third of oil supply.


OPEC member countries: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela

The changing fortunes for oil began in earnest with the oil-producing countries of OPEC in late November 2014. Previously, the group managed the oil price by cutting supply, letting the relatively inelastic demand for oil bid up prices to a level that ensured the OPEC members earned a solid premium. However, a few OPEC members began pumping in excess of the group’s “quota” of 30 million barrels per day (b/d), rising to 33 million by mid-2015, then to approximately 32.5 million in the first quarter of 2016.

Crowding out competition

This quest to gain market share worked to some extent. One motivation for OPEC to boost supply was to crowd out non-OPEC supply, especially U.S.-based shale, the newcomer source, and other sources of crude that require higher prices to break even. Since roughly 2009, over 4 million new U.S. barrels per day have come on the market; oil that previously did not exist. What OPEC did not anticipate was that many of the U.S. independent firms would find ways to slash costs to make $50 oil survivable. And thus further price war occurred in the early months of 2016, with a barrel bottoming at $26 at one point. U.S. production levels have finally succumbed, cutting over 600,000 barrels per day.

U.S. shale production in oil and natural gas has created competition in a market where formerly oligopolists ruled. Oil market expert Dr. Anas Alhajji of Dallas, Texas, identified the threat to Saudi Arabia’s hydrocarbon complex a few years back, but believes that “Saudi Arabia was, is, and will remain the oil market leader.”

Counter-trends from Paris

Though demand for oil is expected to increase globally, there are also counter-trends that could reduce it more than expected, such as the COP21 climate change agreement and public opinion translating into actions that reduce oil consumption. Another reason for OPEC, and certainly Saudi Arabia, to let prices plummet, is to extend the demand curve for oil by the lower price environment. Not too low, however, as OPEC oil revenues declined from $1.2 trillion in 2012 to $500 billion in 2015. Saudi Arabia, with a growing economy, also intends to increase its per-capita greenhouse gas emissions 8% to 2030, relative to China’s 30%, India’s 50% and the G7’s 30% reduction.

Aside from environmental considerations, competition in the crude and hydrocarbon liquids complex is stiffening with the U.S. as an export entrant.  In 2016, crude oil, natural gas liquids and liquefied natural gas (LNG) are exportable. Nations in Central and Latin America, Europe and Asia are lining up to diversify their supply sources and reduce costs.

Source: Enterprise Products Analyst Day, 2016

Source: Enterprise Products Analyst Day, 2016

Strategic policy changes in Saudi Arabia spell new dynamics for oil

Last year’s succession change in leadership in Saudi Arabia to King Salman and his son, the deputy crown prince Muhammad bin Salman, has brought new policy changes. In Saudi Arabia, the younger generation affectionately refer to the prince as “MbS.” The recently rolled-out Vision 2030 agenda calls for a larger role for the private sector, as well as diversifying the state’s budget away from oil. Privatizing some oil-related assets like a small share of the national oil company, Saudi Aramco, and other upgrades to economic policy is slated. Low oil prices have given cover to make some painful but overdue adjustments, such as reducing subsidies that mask costs and true value.

Muhammad bin Salman, Saudi crown prince

Muhammad bin Salman, Saudi crown prince

Can Saudi Arabia reduce oil’s influence in its economy and yet influence world markets? The Vision 2030 plan outlines “transform[ing] Aramco from an oil producing company into a global industrial conglomerate.” According to Dr. Ahajji, Aramco will become an “energy company” in the manner of ExxonMobil, which includes more downstream investment and operations. He further expects “less trade in crude [oil] and more trade in [refined] products.” This is unchartered territory and the direction of trade and shipping will be affected.

An oil supply treadmill makes the current price declines at $30 and $40 levels temporary. Between 2016 and 2020, approximately 31 million b/d (cumulative) might be needed to satisfy demand, as suggested one of the largest midstream firms in the U.S. The needed supply of 6.2 million b/d per year is a composite of oil field declines of 5 million b/d and new demand of 1.2 million b/d. The EIA estimates that $750 billion of investment is needed per year to keep supply in check, 85% of which only maintains current production. Wood Mackenzie, a consultancy, says $380 billion of capital spending has been deferred, nearly half of which was related to projects from 2016-2020. The number of global rigs have declined, mostly in North America, with the Arabian Gulf and Asia up 4% and 22%, respectively.

Of late, oil prices, an important proxy and economic indicator, have been influencing the stock market’s movements. The cohesion of OPEC may be waning, with its most influential member changing course. Ahajji suggests that OPEC without Saudi Arabia is a zombie organization. In the meantime, expect a lengthy period of withdrawal symptoms in markets. If MbS’s view triumphs, the heavy-hand of oil prices will no longer rule.



About Author

Jennifer Warren

Ms. Warren is known for energy trends and resource sustainability analysis, with an emphasis on their economic and geopolitical implications. She is a principal of Concept Elemental, a communications and knowledge work consultancy, serving clients in education, finance, business, global affairs and energy. Her work has been published in numerous academic, policy and business publications in print and online.