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The Saudi delegation led by the kingdom's oil minister, Sheikh Ahmed Zaki Yamani, seated fourth from right, at the OPEC conference in Vienna on March 16, 1974.
The Saudi delegation led by the kingdom's oil minister, Sheikh Ahmed Zaki Yamani, seated fourth from right, at the OPEC conference in Vienna on March 16, 1974.

Crucial link for global oil consumers

Supply regulations remain necessary as IEA forecasts OPEC production will rise in the medium term while non-OPEC production declines

It has often been said, not least by OPEC itself, that if the group did not exist it would have to be invented. From the start, the group founded by five developing nations that sought to reclaim control of their energy resources provoked suspicion and animosity from oil consumers. But rumours of OPEC's demise were always exaggerated.

Has the world, then, discovered it needs OPEC and allowed the group to attain respectability in middle age? The organisation says yes. It says it works to calm markets and stabilise crude prices and that recent history shows price volatility harms both oil producers and consumers. OPEC's opponents argue the group works merely to achieve its members' short-term economic interests. At best, they say, it is a debating club for cosseted third-world oil ministers. At worst, OPEC is portrayed as an "evil cartel" bent on kneecapping advanced economies.

Fadhil Chalabi, a former Iraqi oil minister who is now the executive director of the Centre for Global Energy Studies in London, is critical of OPEC while arguing that it plays an essential role. "In the past, when the major oil companies used to control the industry, their highly efficient supply regulations fostered greater price stability in the oil market," Mr Chalabi said in 2003. "Nevertheless, OPEC supply regulations, although much less efficient, remain necessary."

Mr Chalabi said earlier this year: "The world needs OPEC. The oil industry needs OPEC ? it is the last resort. "Consumers lift non-OPEC oil first and they come to OPEC to fill the gap between what they have and what they need ? OPEC's importance is that it fills that gap." Mr Chalabi argues that market chaos ensues when OPEC fails to act. As crude fell from above US$147 to below $34 a barrel in the second half of 2008, OPEC held a series of emergency meetings. But action was delayed until early the next year, when the group cut output by more than 3 million barrels per day.

"It arrested the fall. So no matter what OPEC is doing ? still it is needed as the residual supplier to keep the balance between demand and supply," Mr Chalabi says. But for how long? "They are talking about investing in productive capacity," he says. "My question is whether in the future this capacity will be needed. If we agree that the long-term trend [for oil] demand is falling, then the need for OPEC oil will be less."

OPEC is staring at a third consecutive year of falling demand for its crude. Its economists forecast a fourth next year. Oil production from outside the group is edging up against an uncertain outlook for global demand. Oil consumption in the industrialised world may already have peaked, while in large developing economies such as China, the runaway growth in demand is slowing. In the world's biggest economy, the US President Barack Obama is implementing energy policy based on populist calls for US self-sufficiency in fuel and especially for less reliance on imported OPEC oil.

Despite the recent hiccup caused by the BP oil spill in the Gulf of Mexico, which has curbed the previously robust US appetite for offshore drilling, the overall plan is going swimmingly. Surging shale-gas production has made the US to all intents and purposes self-sufficient in natural gas. Now domestic onshore oil production from shale formations is rising. The US is also producing record levels of biofuel, OPEC noted this month.

But the pendulum could swing back in as little as five years' time, the International Energy Agency (IEA) and others predict. Badr Jafar, the executive director of the Sharjah-based Crescent Petroleum, is one oil man who is banking on the MENA region - home to eight of OPEC's 12 members - remaining the world's leading energy supplier in coming years. Alternative energy sources such as renewable and nuclear power cannot be developed at the pace and scale required to "sideline" oil in the medium term, Mr Jafar says.

"The Gulf region will therefore assume an even more crucial role in contributing to the world's energy mix," he predicts. Mr Jafar points out that wind and solar power still account for less than 2 per cent of the total energy supply of Europe, the US and China - three areas that have pushed hard to expand renewable power capacity. "Ambitious plans to expand capacity several times again are starting to run up against physical constraints relating to grid capacity and system balancing, which are not easily solved," he says.

"Furthermore, the financial cost of such policies may be prohibitive. Oil and gas demand is here to stay. "The Gulf region plays a critical role in driving the global supply of oil and gas, and will continue to do so, especially as new discoveries elsewhere face major extraction difficulties, which don't apply to the giant fields here in the Middle East. "We are proceeding at full speed with our oil and gas supply projects here in [the MENA region] because we are fully confident that there will be a market which needs them for the foreseeable future."

Lest that sounds like wishful thinking from a company rooted in the region, the IEA agrees. "We have seen an increase in non-OPEC supplies but in the mid-term, non-OPEC production will decline," says Nobuo Tanaka, the executive director of the Paris-based energy adviser to industrialised countries. "So dependency on OPEC oil will increase." The agency's forecasts are regarded as bellwether indicators for the industry.

Mr Tanaka sees a role for OPEC, even in a near future dominated by larger oil stockpiles than normal. He is watching the run-up to OPEC's next ministerial meeting on October 14. "The OPEC has a very good spare capacity at this moment," Mr Tanaka says. "We wish OPEC will take a closer look where fundamentals are going and take quick action." OPEC says it is aware of potential problems ahead. "As we enter the new decade and as we celebrate our golden anniversary, the challenges in the oil market will not disappear," the organisation said in a recent commentary.

Laying claim to a "time-honoured commitment to market order and stability, in support of sustained world economic growth and the fulfilment of a broader-based agenda, such as greater equality among nations and the eradication of poverty in a cleaner and safer world", it seemed determined to grow yet older and wiser. tcarlisle@thenational.ae

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