Current and former OPEC officials said that moves to mitigate the effects of climate change are bringing peak oil demand closer, which could give the largest producers in the Organization of the Petroleum Exporting Countries and their allies more leverage and send some smaller producers into trouble.
Members of the Organization of the Petroleum Exporting Countries and the OPEC+ group face the danger of the United States and China focusing on addressing carbon emissions, and plans to increase the use of renewable energies.This could potentially lead to competition for market share and end cooperation between producers on supply policy, and current and former OPEC officials and others familiar with the matter say they expect competition to increase over time.
“OPEC + will face a great challenge in dealing with the contraction in demand, but it will also face increasing pressure to reduce prices due to the increase in supply,” said Chakib Khelil, a former Algerian oil minister, who served as OPEC president twice.
After decades of insisting that oil demand would rise, OPEC conceded last year that it would stabilize but that stability would not occur until the late 1930s, and since the start of the Corona pandemic, officials say peak demand may come sooner than that.
Khalil said: “It may happen during the next ten or twenty years in light of the current trend of using renewable energy types in the energy mix of major consuming countries.”
The Organization of the Petroleum Exporting Countries, whose 13 members depend on oil sales as a major source of income, celebrated last September its 60th anniversary, having survived crises such as the Iran-Iraq war of 1980-1988, and the collapse of oil prices several times.
Since 2017, OPEC and its allies, led by Russia, have cooperated through the OPEC + bloc to support the market by limiting production.
lower expectations
OPEC’s own expectations for the timing of peak demand are among the most remote expectations made by energy companies, producers and analysts, but an OPEC source said, “The repercussions of the Corona pandemic are likely to lead to a decrease in demand expectations in the long term when the organization publishes its global forecast for oil.” In 2021, which is expected to be released in late September.
Other OPEC officials said, “While the organization believes that demand will reach its pre-pandemic levels in 2022, downward pressures loom on the horizon.”
An official from a major producing country among the members of the organization said: “OPEC may change its forecast for long-term oil demand in its report for the year 2021, due to the problems of climate change and technological developments in the development of renewable energy and improvements in performance efficiency.”
Hassan Qabazard, head of OPEC’s research department from 2006 to 2013, said demand could peak in 10 years and possibly beyond, and this estimate is closer to the timeframe he put forward in comments last year.
He said, “The energy mix will change and peak oil demand will occur sometime during the thirties when the rules for eliminating conventional engines in vehicles will come into effect,” and added, “This peak in demand will stabilize for a long period of time.” The OPEC secretariat had no comment on his expectations.
Peak modes
What changes expectations, says Khelil and some current OPEC officials, is the greater focus by the world’s largest oil consumers on climate change.
US President Joe Biden in February returned the United States to the Paris climate agreement, while Chinese President Xi Jinping last December targeted a sharp reduction in carbon emissions by 2030.
If demand growth slows, producers will pursue fewer customers, and those with the lowest production costs could see more advantage in a market share strategy, which could weaken prices and the OPEC+ alliance.
“Demand for oil may peak very early, perhaps in the middle of the current decade or earlier,” said a senior official at a state oil company in an OPEC member country.
“Low-cost producers like Saudi Arabia and the rest of the Gulf countries will work hard to increase their market share. The smaller, higher-cost international oil companies will already suffer,” he added.
OPEC has about 80% of the world’s oil reserves, of which the Middle East, Saudi Arabia, Iraq, Iran and the United Arab Emirates hold the bulk, and smaller members such as Algeria and Angola, where production is declining, have smaller quantities.
OPEC figures show that over the past decade, Saudi Arabia, Iraq and the UAE have raised their quotas in OPEC production, while the share of most African producers has fallen.
“Peak oil demand will result in a new form of competition between oil producers, even within OPEC, countries like Libya, Algeria, exporting a lot to Europe, and may be Europe has seen peak demand or will see peak in the next few years, the big Gulf producers are naturally inclined towards Asia, so they won’t be vulnerable to that quickly.”
Recent moves by OPEC+ to allocate higher baselines for supply constraints in 2022 to the largest Gulf players suggest that a greater market share is already going to the largest producers.
The official in the main OPEC producer said that while the larger players in OPEC + will strengthen, it will not last for long, adding, “Increasing OPEC’s share in the shrinking oil market will not be beneficial in the long run for member states if global demand for oil is steadily declining.”
Khelil also expects that major producers will benefit more and that the organization will retain a role to play in responding to the declining demand for oil.
He said, “Depending on political affairs between OPEC + countries, we may witness greater competition or greater cooperation, greater competition may lead to chaos among small producers, while greater cooperation may allow their role in OPEC + to continue.”
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