CSS Analyses in Security Policy CSS ETH Zurich N0. 216, November 2017, Editor: Fabien Merz OPEC and Strategic Questions in the Oil Market The massive expansion of shale oil extraction in the US marked the beginning of a global glut in the petroleum markets. This is just one of many factors raising the pressure on OPEC and other producers. Two possible development trends are emerging. By Severin Fischer Venezuela’s current political and economic crisis encapsulates the hard times that some major oil-producing countries are ex- periencing these days. The high revenues of the years 2008 through 2014, when prices stood at well over USD 100 per barrel (USD p.b.), have fostered mismanagement and corruption in many petro-economies. After the collapse of prices in late 2014, so- cietal expectations of state services could often no longer be fulfilled. Ever since, governments have been coming under in- creasing pressure. Against this background, the Organization of Petroleum Exporting Countries (OPEC), together with 11 other oil pro- The global oil market is characterised by an oversupply since the beginning of 2015. Duvignau/Reuters ducers, decided in November 2016 to throttle extraction rates to achieve a price increase. Despite widespread expectations among many experts to the contrary, the group has so far largely succeeded in meet- emerging economies and the resulting duction of energy intensity in the manu- ing its commitments and demonstrating shortage of supply. A high-water mark of facturing sectors of emerging economies. the ability to act. However, it is still too nearly USD 150 p.b. was reached in early soon to determine whether this will ease 2008, followed by a price collapse in the Without question, the main factor of market tensions in the long run. wake of the global economic crisis. A third change is to be found in the US. After see- phase can now be discerned since the be- ing a decline in production from about 2.5 Changes in the Oil Market ginning of 2015, with price levels remain- billion barrels annually in the 1980s to 1.8 Developments in the global oil market over ing largely below USD 50 p.b., a clear over- billion barrels around the year 2005, the the past decades can be broken down into supply on the oil market, and the country had already begun strategic prepa- three phases. Starting from a phase of rela- accumulation of massive stocks. The main rations for a noticeable increase of import tive stability pre-2004, when prices usually drivers in the current situation are the con- dependency. However, beginning in 2008, peaked at below USD 30 p.b., 2005 saw the siderable expansion of shale oil production the development of new extraction tech- start of a phase of high price volatility, in the US and a stronger-than-expected niques and an advantageous regulatory which was seen as caused by the growth of decline in demand pressure, caused by a re- framework favored a strong increase in oil © 2017 Center for Security Studies (CSS), ETH Zurich 1 CSS Analyses in Security Policy No. 216, November 2017 Oil market 2012–2017 oil consumption has most recently dropped ber Saudi Arabia, and its flexible output. below predictions, a decline of global de- On the consumer side, the International mand on the scale required for climate pro- Energy Agency (IEA) was created as the tection is not yet apparent. Nevertheless, institutionalized representation of the demand in 2015 and 2016 plainly lagged Western consumer states. However, in behind the rapid increase of supply, sug- practical terms, the US with its strategic oil gesting, despite the absence of hard data, reserve, with its military presence in the that global oil stocks are at an all-time Middle East, and acting as the guarantor of high. One indication of temporary over- maritime trade routes ensured that the supply is the fact that political crises in and overall system operated smoothly. Europe- between oil-producing countries, such as an and Asian industrialized nations bene- the Saudi embargo against Qatar or the in- fited from the mutual arrangements be- dependence referendum in the oil-rich tween the energy heavyweight and the Kurdish region of Iraq and the subsequent military superpower without being required conflict over the oil wells near Kirkuk, had to contribute significantly themselves. little long-term effect on prices. The huge growth in Asia’s emerging econ- OPEC in Transition omies in particular and the shale oil revolu- Since the foundation of OPEC in 1960 tion in the US have eroded these gover- and the first oil crisis of 1973–4, the cartel nance structures over the past decade: The of oil producers has been the point of refer- IEA and the US no longer represent the ence when it comes to geopolitical devel- spectrum of consumers, nor does OPEC opments in the oil market. From its foun- control the lion’s share of production. The dation, the organization has had the stated US-led invasion of Iraq in 2003 seems to aim of applying political pressure to con- have rung the death-knell for US efforts to production from unconventional sources. trol production quotas and prices. The first safeguard energy interests by military By 2015, at 3.5 billion barrels annually, the successful example of such pressure was the means in the Middle East. With the rapid US was producing more oil than ever be- boycott against Western supporters of Is- growth of production in the US, securing fore. At the end of that year, it lifted the rael in the 1973 Yom Kippur War. access to regional oil sources will likely be- export ban on crude oil, which had been in come less important to Washington, at force since the first oil crisis of 1973, re- However, when considering OPEC’s role least in the medium term. flecting a changed perspective on oil mar- as a mighty oil cartel, observers often un- kets. The new administration of US Presi- derestimate the heterogeneity of its mem- From the perspective of the consumer dent Donald Trump even went one step bership. A huge imbalance of power and states, the challenges posed by the develop- further and has recently labeled its new ap- influence between the rich states of the ment of prices and market fluctuations are proach “energy dominance”. Persian Gulf, which have high output and mainly economic in nature; but for many benefit from low extraction costs, and the governments in oil-producing states, these The US shale oil industry is characterized poor oil-producing states of South Ameri- are questions of political survival. Follow- not only by rapid growth, but also by sensi- ca and Africa, where costs are high and ing the price collapse of late 2014, many tivity to short-term price fluctuations and production is low, has become more and OPEC states vocally and urgently de- the flexible nature of the many small inde- more obvious in recent years. In addition, manded measures to stabilize oil prices on pendent companies operating thousands of OPEC is riven by severe clashes of interest a higher level. A strategic decision by the wellheads. For instance, the abrupt collapse and political conflicts, which of prices in 2014 brought a swift consolida- are most palpably manifested in Observers often underestimate tion of the market, together with a series of the decades-old hostility be- the heterogenous nature of bankruptcies. However, production picked tween two major producers, up again nearly as quickly in 2016; this Iran and Saudi Arabia. This is the OPEC. time, the cost per drill site had been re- why experts have argued for duced by one third, and the productivity of years over whether OPEC, given its limit- Saudi royal family reflects the extent to each individual wellhead had been dou- ed share of global supply and its internal which interests within OPEC are currently bled. Thus, since 2014, the US shale oil in- conflicts, should even be considered a “car- diverging: Rather than responding to in- dustry has established itself as the third tel” anymore. What seems certain, however, creased US shale oil extraction by cutting important collective actor, next to the po- is that Saudi Arabia alone, as the biggest its own production rates and thus stabiliz- litically controlled state companies of OPEC producer and accounting for one ing prices, Saudi Arabia maintained its OPEC member countries and the major third of the organization’s output, is the high production rates in order to undercut Western oil and gas companies. However, only actor able to affect the global oil mar- its new competitor across the Atlantic with the shale oil industry operates largely inde- ket individually by expanding or throttling low prices and thus assert its own predom- pendently of the political sphere, respond- its flexible production volume. inance on the oil market. ing primarily to price signals. Between the 1970s and the mid-2000s, the However, the Saudi refusal to throttle pro- While structural changes have strongly in- global oil supply system gradually adopted a duction was not only aimed at the new fluenced the supply side in the past decade, governance structure that was shaped on competitors in the US: After the recent demand appeared rather stable. Although the producer side by OPEC, its main mem- lifting of US sanctions, it wanted to ensure © 2017 Center for Security Studies (CSS), ETH Zurich 2 CSS Analyses in Security Policy No. 216, November 2017 Members of the “OPEC+”-Deal and the six biggest producers that Iran would be prevented from making It was ultimately Russian President Vladi- production even further than agreed, most urgently needed investments in its obsolete mir Putin who brokered the deal on OPEC OPEC states failed to adhere fully to their oil industry, and would thus be economi- production cutbacks that was achieved in commitments.