The Organization of Petroleum Exporting Countries (OPEC) has been a model of reliability during the pandemic, but don’t rely on the same for energy transition plans.
OPEC is better suited to guide markets through the pandemic than for the transition to renewable energy, according to energy giant bp. And that may make for a more volatile future on oil markets.
“In response to an economics exam question of what type of demand shock is OPEC best able to stabilise – a global pandemic followed by a successful vaccine would be close to the perfect answer: relatively short-lived, temporary shocks,” bp wrote in its Statistical Review of World Energy 2021.
OPEC and Russia certainly bungled the beginning of the pandemic. Covid arrived unexpected, just as the cartel players and Russia embarked on a battle for market share by dumping extra supply on the market. Lockdowns stopped travel and extra supplies were diverted to storage, which then pushed oil prices negative. It was unprecedented territory.
Yet from there on, the cartel and Russia acted quickly and decisively, removing excess supply and balancing markets. Oil consumption fell by 9.3 percent to its lowest level since 2011, according to bp statistics. OPEC mostly matched that in initial production cuts to eradicate the glut and has since then managed the return of supply. The response has been exemplary – just as bp has identified.
Yet something unexpected happened during the pandemic year. Governments, investors and voters decided to raise the bar and get serious on plans to cut carbon emissions to fight global warming. The European Union pledged to hit net zero emissions by 2050. Automakers prepared to sell increasing numbers of electric cars.
Major oil companies such as bp, TotalEnergies and Royal Dutch Shell shifted strategies towards a utility model of energy delivery, based on renewable energy and natural gas. All of this has put oil in the crosshairs over the long term – and OPEC may prove less able to cope with that development.
“In contrast, the ability – and incentive – for OPEC to offset a sustained and growing fall in oil demand as the world transitions to net zero is less clear,” according to bp. “In this case, there may be a greater incentive for individual OPEC members to worry more about protecting and growing their market shares and less about stabilizing markets.”
Oil prices are very sensitive to the ability of OPEC+ to hold ranks and function. This is as important as any OPEC decision itself. If it becomes obvious that cartel participants are failing to cooperate, then crude prices take a dive. Oil traders assume each nation will take the “every man for himself” route and pump at maximum levels, leading to gluts.
Oil prices have rebounded above pre-pandemic levels, steadily inching upwards as OPEC continues to hold back a return to full output. Yet the stability is deceptive.
At present, bp doesn’t appear to be saying that a rift in OPEC is imminent. Yet the notion is a reminder that disagreements over quotas have happened before – just over a year ago, in fact – and there is no reason to think it won’t happen again. That scenario could send oil prices tumbling.
On the other hand, the diversion of investment to gas and renewables from some of the industry’s biggest players may not necessarily happen in step with a global shift. Russian industry bosses last month warned of long-term oil undersupply dangers as a hazard of transition.
This would seem to set up a situation where oil prices will become increasingly volatile, and thus the function of OPEC increasingly important. The cartel has done well to date, but even the industry giants are preaching caution for the future.