10/20/14, "A World Without OPEC?" NY Times Op-ed, Joe Nocera
"Forty-one years ago this month, the Arab oil embargo began. The countries that were part of it belonged, of course, to the Organization of Petroleum Exporting Countries — OPEC — which had banded together 13 years earlier to strengthen their ability to negotiate with international oil companies. The embargo led to widespread shortages in the United States, higher prices at the gas pump and long lines at gas stations. By the time it ended, the price of oil had risen to $12 a barrel from $3.
Perhaps more important than the price increases themselves was the new world order the embargo signaled. The embargo “set in motion geopolitical circumstances that eventually allowed [OPEC] to wrest control over global oil production and pricing from the giant international oil companies — ushering in an era of significantly higher oil prices,” as Amy Myers Jaffe and Ed Morse noted in an article in Foreign Policy magazine that was published last year at the 40th anniversary. Twice a year, OPEC’s oil ministers would meet in Vienna, where they would set oil policy — deciding to either hold back or increase oil production. There was always cheating among members, but there was usually enough discipline in the ranks to keep prices more or less where OPEC wanted them.
As it happens, the title of that Foreign Policy article was “The End of OPEC.” Jaffe and Morse are both global energy experts — she is the executive director of Energy and Sustainability at the University of California, Davis, and he is the global head of commodities research at Citigroup — who say that if America plays its cards right, OPEC’s dominance over the oil market could be over. I think that day may have already arrived.
“OPEC is not going to survive another 50 years,” Morse told me. “It probably won’t even survive another 10. It has become extremely difficult for them to forge an agreement.”
When Morse and Jaffe wrote their article last year, the price of oil was more than $100 a barrel.
Today, the per-barrel price is in the low- to mid-$80s. It has dropped more than 25 percent since June.
There was a time when $80 a barrel would have been more than satisfactory for OPEC members, but those days are long gone. Venezuela’s budgetary needs requires that it sell its oil at well above $100 a barrel. The Arab Spring prompted a number of important OPEC members— including Saudi Arabia and the United Arab Emirates — to increase budgetary spending to keep their own populations quiescent. According to the International Monetary Fund, the United Arab Emirates needs a price of more than $80 to meet its budgetary obligations. That’s up from less than $25 a barrel in 2008.
Not long ago, Venezuela asked for an emergency OPEC meeting to discuss decreasing production. Iran has said that such a meeting is unnecessary. Meanwhile, Saudi Arabia has made it clear that it is primarily concerned with not losing market share, so it will continue to pump out oil regardless of the needs of other OPEC members. This is not exactly cartel-like behavior. The next OPEC meeting is scheduled for late November, but there is little likelihood of an agreement.
And why does OPEC suddenly find itself in such disarray? Simply put, the supply of oil is greater than the demand, and OPEC has lost its ability to control the supply. Part of the reason is a slowdown in global demand. China’s economy has slowed, and so has its voracious appetite for oil. Japan, meanwhile, is increasingly turning to natural gas and nuclear power.
But an even bigger part of the reason is that the shale revolution in North America is utterly changing the supply-demand dynamic. Since 2008, says Bernard Weinstein, an energy expert at Southern Methodist University, oil production in the United States is up 60 percent. That’s an additional three million barrels a day. Within a few years, predicts Morse, America will overtake Russia and Saudi Arabia and become the world’s largest oil producer.
What’s more, according to another article Morse wrote, this one for Foreign Affairs magazine, “the costs of finding and producing oil and gas in shale and tight rock formations are steadily going down and will drop even more in the years to come.” In other words, the American energy industry might well be able to withstand further price drops easier than OPEC members.
When I got Jaffe on the phone, I asked her if she thought OPEC was a spent force. “You can never say never,” she replied, and then laid out a few dire scenarios — mostly revolving around oil fields being bombed or attacked — that might make supply scarce again. But barring that, this is a moment we’ve long been waiting for.
Thanks to the shale revolution, OPEC has become a paper tiger."
"The U.S. energy industry looks poised to end the decades-long, precarious "dependence on foreign oil."...(from Foreign Policy article linked in above NY Times op-ed).
10/16/13, "The End of OPEC," ForeignPolicy.com, by Amy Myers Jaffe, Ed Morse
"Forty years after the Arab oil embargo, new technologies are dramatically reshaping the geopolitics of the Middle East."
"Forty years have passed since the Arab oil embargo went into effect on Oct. 16, 1973, triggering a period of incredible change and turmoil. After the United States provided support to Israel during the Yom Kippur War, a cartel of developing-world countries (via the Organization of the Petroleum Exporting Countries, or OPEC) banned the sale of their oil to Israel's allies and thereby set in motion geopolitical circumstances that eventually allowed them to wrest control over global oil production and pricing from the giant international oil companies -- ushering in an era of significantly higher oil prices. The event was hailed at the time as the first major victory of "Third World" powers to bring the West to its knees.
Designed in part to bring Arab populations their due after decades of colonialism, the embargo opened the floodgates for an unprecedented transfer of wealth out of America and Europe to the Middle East. Overnight, the largest segment of the global economy, the oil market, became politicized as never before in history. But four decades later, the shoe may finally be on the other foot. Now, on the 40th anniversary of the 1973 embargo, the United States has a historic opportunity to lead a counterrevolution against the energy world created by OPEC as innovation in the U.S. energy industry looks poised to end the decades-long, precarious "dependence on foreign oil."...
Rather than let the forces of supply and demand determine prices, post-1973, the lowest-cost oil producers, such as Saudi Arabia, Iraq, and Iran, artificially shut production and discouraged capital investment, creating a lasting wedge of rents or financial profitability that market conditions never warranted. (Today, oil prices in real terms are more than four times higher than in 1972.)...
The 1970s witnessed a profound and unprecedented transfer of wealth to the Middle East that continues to have significant repercussions today -- from democracy movements to terrorism to civil wars. The region's leaders failed to set up long-term mechanisms to distribute the benefits of that wealth transfer broadly to their populations and to establish an equitable stake in governance of resource proceeds that would have brought a newfound stability to the region. Instead, they bought lavishly, gilding their palaces and buying fleets of luxury autos. For decades, they squandered the opportunity to use oil wealth to modernize their societies and train their populations for future global economic competition. The result -- unfolding not just in the Middle East but in other oil-producing countries as well -- is a crisis of governance that is itself triggering a round of oil-supply disruptions.
Massive petrodollar inflows brought with them a new political paradigm of "rentier" patronage, characterized by financial excesses, corruption, repression, and billions of dollars in accumulated weapons purchases. Populations of oil-producing states, for the most part, are little better off today than in 1973. Many of the countries have been war-ravaged or riven by sectarian hatreds. And, even with decades of relatively high oil prices and associated worker remittances, most countries of the Middle East still see modest GDP per capita, below $30,000 person on a purchasing-power-parity basis.
Deep income inequality means that much of the region's population is in fact still living in poverty, even in places like Saudi Arabia. So it should be no surprise that 40 years after the 1973 embargo, citizens of the region are rising up against those who squandered their futures. Tired of waiting for the day when rising oil revenues would somehow magically bring back the promise of prosperity, youth are taking to the streets; port and oil workers are mounting strikes; and jihadists are taking up arms to end the oil curse once and for all. Their frustrations do not unfold in a vacuum. High oil prices associated with all this unrest is propelling energy investment elsewhere to great success.
Energy efficiency is also getting a boost, shrinking the long-term market for Middle East oil. The upshot will be that it will be harder and harder over time for Arab rulers to count on oil money to keep them in power. And that has a trickle-down effect to the populations they've been keeping quiescent with handouts for decades.
Ironically, just when political revolutions were gaining momentum across the Middle East, a different kind of revolution was emerging that looks likely to bring a new epoch of dislocation and distortion to prevailing oil and gas structures. This second energy revolution is also ameliorating the impact of the first.
Since January 2011, at the dawn of the rebellions against dictatorial governments in North Africa, the amount of oil "offline" or being blocked from production by either domestic turmoil (in Iraq, Nigeria, Sudan, Syria, Yemen) or international sanctions (in Iran) has generally been above 2 million barrels per day (m b/d), four times the average level of supply outages before the so-called Arab Spring.
Then Libya erupted once again this past summer, taking another 1.2 m b/d, or more, offline. But the impact of these disruptions has been relatively mild, given that over the same period, production in North America, the heartland of the three revolutionary changes in unconventional hydrocarbon production (shale, deep water, and oil sands), has grown by more than 2.5 m b/d. And more is on the way.... The impact of all this change in the energy world will go far beyond just replacing continuing Arab Spring outages. Unconventional oil and gas and the clean-tech booms are spawning a host of new, smaller oil and gas exploration companies committed to innovation and willing to take on risk. They have no stake in the multibillion-dollar megaproject world of the international majors and national oil companies, and as such, they have fewer concerns about sustaining high profits from giant assets found decades ago. They are enabling the United States the opportunity to take a lead in changing the way energy is bought and sold -- not just in the United States, but globally.
Energy innovation is taking many forms in the United States, creating major export opportunities and giving Washington the tools it needs to ensure that the conditions of a 1973-style oil embargo will not repeat themselves. The oil embargo was so devastating because strong economic growth throughout the 1960s had taken up the margin of spare oil-productive capacity in the United States and across the world, leaving the Middle East's oil producers with undue monopoly power. Similar razor-thin extra productive capacity left markets highly vulnerable in 2006 and 2007, when OPEC made contraseasonal cuts in output to increase prices, instead of considering the risks to global economic growth. But as oil and gas production from U.S. and Canadian shale formations rises, the ability of oil producers like Russia to use an "energy weapon" to gain extra benefits from consuming countries is diminishing....
Abundant U.S. natural gas is just the first step. Booming domestic natural gas supplies have already displaced and defanged Russia's and Iran's grip on natural gas buyers. By significantly reducing American domestic requirements for imported liquefied natural gas (LNG), rising U.S. shale gas production has had the knock-on effect of increasing alternative LNG supplies to Europe, breaking down fixed pricing from entrenched monopolies. But this is just the beginning: Over the coming decade, the United States looks likely to overtake Russia and rival Qatar as a leading supplier of natural gas to international markets....
American unconventional oil and gas plays from Texas to Pennsylvania are also generating new surpluses of natural gas liquids, which are increasingly exported as transportation fuel or petrochemical feedstock to Europe, Asia, and elsewhere -- reducing demand growth for oil from the Middle East. And U.S. crude oil exports might also be possible some day, strengthening America's lead in market-related pricing for kingpin crude oil, much the way rising North Sea production did in the 1980s.
As an increasing number of companies and investors flock to North America to develop prolific unconventional resources, Middle East heavyweights like Saudi Arabia, Kuwait, and Iran are losing their lock on remaining exploitable reserves, reducing their ability to band together and create artificial shortages. Already, Mexico and Argentina are reading the tea leaves and reversing protectionist resource nationalism policies, instead pushing through reforms to attract capital investment to their doorsteps....
Some 40 m b/d of the global 85 m b/d oil market is open for competition from natural gas -- in the form of compressed natural gas for cars and buses, and LNG for heavy-duty vehicles and marine transportation. We conservatively expect at least 2 m b/d of currently projected oil demand to cede to natural gas by 2020, further weakening perspectives on future global oil-demand growth and once again chipping away at Middle Eastern influence."...