The meeting of oil ministers of 12 member-states of the Organisation of Oil Producing Countries (OPEC), who account for 40 per cent of world oil production, took place in Vienna on November 27 in the background of a serious crisis facing the organisation - the dramatic decline in oil prices over the last five months. There were widespread expectations that OPEC would decide on a production cut to raise prices. In the event, after a five-hour meeting, the ministers decided to take no action whatsoever; prices then fell a further five per cent to $72 per barrel.
Earlier, oil prices had plunged 30 per cent from $115 per barrel in June this year to around $80-82 in November. Though the fall took most policy makers and market analysts by surprise, there has been no panic among the principal producers in the Gulf Cooperation Council (GCC) countries. The fall is due to a demand-supply mismatch, with the market being awash with US shale oil and increased supplies from Iraq and Libya, amidst sluggish economic growth in Europe and Asia, particularly China, where growth projections of over seven per cent indicate a flat oil demand over the next year or so. The Washington-based Energy Information Administration (EIA) forecasts that next year oil prices will fluctuate between $ 80-90, averaging $83 a barrel, while JP Morgan predicts $80-95 over the next two years.
The response of GCC ministers has so far been cautious but confident, saying that market conditions, not producers, determine prices. Saudi production has remained steady, standing at 9.704 million barrels per day (mbd) in September and 9.69 mbd in October. The Abu Dhabi national oil company, ADNOC, has announced that it is going ahead with projects that will raise domestic production from 1.4 mbd to 1.8 mbd by 2017, and also develop its refining and gas potential.
The Saudi refusal to play its traditional role of "swing producer" and cut production has surprised analysts, leading to speculation that there could be political motives behind its inaction, though this has been firmly rejected by the Saudi oil minister. The bewilderment of observers is justified since GCC producers obtain 90 per cent of their revenues from oil sales, so that a price fall of $25/barrel reduces GCC revenues by eight percentage points of GDP.
Benefiting from high oil prices, GCC revenues doubled from $317 billion in 2008 to $729 billion in 2013, yielding fiscal reserves of $2.4 trillion at present. These will allow the GCC economies to sustain low prices for a year or so, but they will come under pressure after that, due to funding requirements for infrastructure, energy and industrial development, and the burgeoning welfare obligations committed to their nationals in the wake of the Arab Spring. This has meant that fiscal break-even oil prices of most GCC producers will be in the range of $77-127 in 2015, with the Saudi threshold price being $106.
For 2015, OPEC has projected an increased world demand of 1.19 mbd, though demand for its own produce will decline to 29.2 mbd, suggesting a continuing surplus of about a million mbd. The GCC countries are still reluctant to intervene in the market. They were under considerable pressure at the recent OPEC ministerial to agree on production cuts from members facing domestic economic and political turmoil such as Iraq, Iran, Nigeria, Libya and Venezuela. However, the Saudis and the other GCC countries resisted these pressures since they believed they just would not work. This is because the problem of over-supply is mainly due to US production; even if OPEC were to agree on cuts, non-OPEC producers would continue to flood the market. The other consideration is the persistent "indiscipline" among OPEC members: in the past, when cuts have been agreed to, most countries have actually increased production to maximise revenues, leaving Saudi Arabia to bear the brunt of the reduced production. After the OPEC meeting, the secretary general asserted that "the decline of the price does not reflect a fundamental change", clearly affirming that market forces will continue to prevail for now. In these obviously difficult circumstances, what explains the GCC position?
First, GCC producers believe that in the short term of a year or so, the oil market will stabilise itself, and surpluses in the market will be absorbed by improved economic performance globally, particularly in Asia. The Saudi national oil company, ARAMCO, has affirmed its focus on Asia, to which it sells 68 percent of its oil exports, with the slogan "expand and grow together", and has announced new investments to increase refining capacity. As of now, the Saudi priority is maintaining its market share, for which it plans to retain production of over nine mbd in 2015, and tactically offer reductions in its official selling price in different markets so that it remains competitive even in the prevailing uncertain conditions.
Again, from the GCC perspective, the long-term outlook is also positive. The Paris-based International Energy Agency (IEA), in its latest report, has projected a global production requirement of 104 mbd in 2040, as against the present 90 mbd. To meet this target, the world will need both additional conventional oil, mainly from the GCC, Iran and Iraq, and unconventional oil, such as: shale oil from US and other sources; ultra-deep sea oil from Brazil; oil from tar sands in Canada, and oil from the environmentally sensitive Arctic region. Unconventional oil requires investments of over $90 per barrel. Current prices do not support the development of these resources, and there are already indications of a slowdown in investment in unconventional production in the US, Canada and Brazil, and a reluctance to invest in new countries with shale oil potential.
Given the long gestation periods in the development of new oil resources, the IEA has projected a requirement of annual investments of $900 billion from now to the 2030s. Since US shale oil production will experience steep declines from the 2020s, the Gulf, with 30 percent of world reserves, will be at the centre of new investments for global energy security. It is in this background that GCC producers believe that the oil market will soon set a "fair" price that will promote growth among consumers, while encouraging producers to invest in new projects.
The writer is a former diplomat
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