The Big Picture

Producers Are From Mars, Consumers From Venus

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  • Relations between producers and OECD consumers have slipped to their lowest point since the 1973 oil embargo.
  • The Ukraine war is intensifying two apparently contradictory consumer policy responses — a push for more supply now, alongside an even stronger push to reduce long-term dependency on hydrocarbons.
  • Opec-plus' decision to sit tight is likewise confounding consumers, underscoring the policy conundrum the energy transition poses to both sides.

Opec-plus’ supply response — or rather the lack of it — to the recent crisis is unusual. For all its talk of wanting to avoid politicizing oil, in the past Opec (and in particular its kingpin, Saudi Arabia) has historically stepped in to make up for any major outage, whatever its cause. To name just a few, Riyadh increased output to compensate for Libya’s outage during its 2011 revolution, Iraq’s output collapse after the US-led invasion in March 2003, and Venezuela’s oil strike just a few months earlier.

True, while a substantial drop in Russian oil supply is widely expected, so far there has been little proof of a hard fall: Russian government data shows crude and condensate production declined by just 65,000 barrels per day in March. But more weighty is the current 320,000 b/d Caspian Pipeline Consortium outage. Previously, by this point in any price crisis cycle, with Brent having touched $130 per barrel last month, Opec would typically be loudly signaling that it was prepared to take action to balance the market. Not today. Opec-plus for months now has been dismissing increasingly frantic OECD calls for more oil, most recently at its Apr. 1 ministerial meeting — and consumers have instead moved to release oil from strategic stocks.

There are reasons for this apparent indifference. Until very recently, an Iran nuclear deal was a very real prospect. Covid-19 lockdowns in China are also a concern. But another key factor has been the need to retain Moscow’s participation in Opec-plus. The extra market share heft Russia brings to producer market management is seen, probably with good reason, as essential to Riyadh’s energy transition survival strategy.

Opec-plus’ departure from its traditional supply responses, and its prioritization of relations with Russia over demand destruction concerns, is nevertheless striking. And Russia apart, there are two deeper, and not unconnected, issues at play in this retreat from traditional market management.

First there is Washington’s departure from its traditional role as Gulf security guarantor. The US has been increasingly unwilling to back Gulf states’ security needs, whether it be in Yemen or over Iran. Washington has been found wanting, even as regards the protection of the Gulf energy sector — presumably of importance for Western national security. Atmospherics have not been helped by the increased human rights focus of the administration of US President Joe Biden.

Transition Driver

Second is the energy transition. Perhaps there was never going to be a pain-free way for consumers to send the message that the world needs to radically reduce hydrocarbon use to avoid catastrophic climate change. But speaking to producers, the impression is that their arguments that fossil fuels have a role to play — and that climate solutions should not be biased "toward or against any particular source of energy" — were swatted away like flies during last autumn’s Glasgow climate conference. Opec Secretary-General Mohammed Barkindo recently complained his group was unable to even book a room to hold a meeting at Glasgow.

OECD energy watchdog the International Energy Agency (IEA), historically the main institutional voice for consumer energy policy, has played a critical role in climate debate. Producer criticism of this role has intensified since the publication last year of its Net-Zero by 2050 report, which said no further investment in new oil and gas projects was needed if the world wants to hit that target.

The IEA has consistently argued for developed world financial support to poorer countries to enable a just energy transition. In the absence of such funds, the organization has become a lightning rod for producer grievances over what is increasingly seen as a high-handed approach to climate policy. Relations have deteriorated to the point where Opec last month expelled the IEA from the group of secondary source assessors it uses to measure its output and monitor compliance.

Endgame Politics?

Perhaps, from a producer perspective, current prices help send a message to consumers that hydrocarbons matter and that they have to be part of the discussion. Opec’s “policy right now is to use this [crisis] ... It is the last chance to get people to sit down at the table and engage in a real negotiation about the future,” argues former Algerian Oil Minister Nordine Ait-Laoussine. “Opec is doing what it has to do … this is the end-game for fossil fuels.”

And from where Opec-plus is sitting, it looks like the West wants to have its cake and eat it when it comes to supply. What's more, Washington’s arms-length approach to the region has inevitably led to a lessening of influence. The fact is Europe and the US are now relatively minor crude customers for the big Gulf producers, and the West, while still a powerful force, no longer holds a monopoly on arms, engineering or technology.

For better or worse, geopolitically, Gulf producers have come of age. The inevitable consequence of a shrinking Western security guarantee is that the region builds its own security architecture. In recent years, Mideast players have been active in conflicts in Yemen, Libya, Ethiopia, sub-Saharan Africa and Afghanistan. The recent Ukraine crisis has also seen Mideast actors — the United Arab Emirates and Turkey — step up as mediators.

COP Calling

This year’s COP27 climate conference in Egypt will be a key opportunity for a reset of the transition debate. This week’s report from the UN’s Intergovernmental Panel on Climate Change (IPCC) stresses the urgency of immediate action to combat climate change and calls for a major reduction of fossil fuel usage. But the report also emphasizes, perhaps more than in the past, the necessity of prioritizing action on coal and methane emissions reduction; the importance of carbon reduction, including offsets such as tree planting (a solution favored by Saudi Arabia); and carbon capture and storage (CCS) and direct air capture.

The inclusion of CCS is arguably a win for Gulf producers, who have actively promoted CCS, which they can deploy relatively cost effectively. Environmentalists have said so, arguing this amounts to a watering down of the report with unicorn technologies. This edition of the IPCC report also sees an evolution in its recognition of the impacts of climate action. “Many countries, businesses and individuals stand to lose wealth from stranded assets,” it noted, acknowledging too the risk that asset owners may “hinder climate policy reform.”

Opec-Plus Supply , Low-Carbon Policy, Military Conflict, Sanctions
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