TORONTO: Oil Markets are undergoing massive structural changes and a new world energy order is in the making.
In the process, for Riyadh and other major stakeholders, their central strategy of managing global oil prices by regulating supply and supporting prices seems to have been discarded. Targeting prices has become pointless.
Indeed new variables have made the emerging energy equations more complex. The development of unconventional oil production from US shale deposits and other sources such as Canadian oil sands has made redundant the very idea that crude is ‘a scarce and finite resource’.
Russia, which is not a member of the Organisation of the Petroleum Exporting Countries (Opec), has also contributed to ample global supply. And now Iran is re-entering the fray and wants no strings attached to it.
This is causing some soul searching within the Opec. The producers’ group is split over how to respond to this. The split reportedly resurfaced at the long-term strategy meeting of the Opec governors in London last Monday where it was argued if the group should keep targeting prices or not.
Iran, represented by its governor Hossein Kazempour Ardebili, has been arguing that this is precisely what Opec was created for and hence “effective production management” should be one of its top long-term goals.
But Saudi governor Mohammed al-Madi reportedly said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so. “Opec should recognise the fact that the market has gone through a structural change, as is evident by the market becoming more competitive rather than monopolistic,” al-Madi told his counterparts inside the meeting, sources familiar with the discussions were quoted by Reuters as saying.
“The market has evolved since the 2010-14 period of high prices and the challenge for Opec now, as well as for non-Opec (producers), is to come to grips with recent market developments,” al-Madi emphasised.
Opec has lost its power to shock, or indeed to influence global production of oil and its price much at all, most now concede.
“The era of Opec as a decisive force in the world economy is over,” Daniel Yergen pointed out while talking to the Financial Times recently.
There are indeed reasons for this — from changing energy intensity and improvements in efficiency to the de-industrialisation of major global economies — and from the growth of renewables to the advent of American shale and other new sources of non Opec supply.
Oil today is no more a scarce commodity. The oil debate and all its accompanying analysis used to be dominated by peak oil supply and the inevitable date when it would all run out. This no longer is the case. There is more oil today than the world knows what to do with and as soon as the wells start running low, new reserves are found or new ways of reaching them are invented.
And in the meantime, the issue of peak oil demand has entered the fray. In the past, low oil prices pushed global demand much higher but today rising vehicular efficiency, new technologies and environmental policies have put a lid on growth. Thus despite record low prices in the past year, demand is not expected to grow by more than 1 million barrels per day in 2016, just one per cent of global demand.
This is a far cry from the past. Market dynamics were different then. Producers’ then were concerned more about maximising their long-term revenues, even if that meant pumping fewer barrels and yielding market share to rival producers. Market share was not influencing and dictating the policy making then.
Things have but changed. With the importance of oil declining, it is now time to prioritise market share. Most producers hence are of the view; it would be better off producing more at today’s low prices than reducing output, only to sell for even less in the future as global demand ebbs.
“The oil industry is, relatively speaking, not a growth industry anymore,” a source was quoted as saying. And this new reality seems very much guiding the emergence of the new global energy order. The issue of market share would dominate the global energy markets for a considerable period of time, one could say with some degree of conviction.