OPEC/non-OPEC is a disjunctive, if we consider the work done to reach an agreement in November with OPEC based in Vienna, followed by the December commitments from non-OPEC countries led by Russia; together these oil producers raised prices to levels never seen in the past decade. The agreement, which will be implemented during 2017, will show us whether there really is a revival of prestige and a real political presence for the Organization. In previous editions of Oil, we have considered the difficulties faced by an organization that had strong leadership in the ’70s and ’80s but has struggled to rebuild its image, especially since the start of the 21st century. There are many reasons for this difficulty, as we know; first and foremost, the changing role of oil itself and, as a result, that of the producing countries, which have lost power and prestige as they have confronted an almost completely changed culture of energy supply. And internal difficulties must not be forgotten, especially in the Arab countries in South American countries such as Venezuela and in some African countries. In any case, trumping everything is the confrontation with fundamentalists driven by radical Islam. While the establishments of the oil-producing Arab countries are fully immersed in this problem, sometimes even Western countries are hit by terrorism where dynasties and consolidated balances have been in play not just for decades but sometimes for centuries. The beginning of the 21st century has seen a constant decrease in oil prices, an increasingly pressing demand to move away from a system strictly centered on oil and,weighing on this, are the highs and lows of production, linked to prices.
Triumph reveals loss of influence
OPEC’s loss of influence was evident to everyone, a loss demonstrated by the ''triumphalist'' tone with which, in November, after months of negotiations, it announced an internal agreement, one that even included Iraq and Iran, to cut production by as much as 1.2 million barrels per day in order to raise prices through a stable and controlled system. It was no small deal, if we consider that this agreement had to sacrifice Indonesia’s membership in OPEC. Indonesia had returned to OPEC after having been outside of the organization for a long time, but left again when it chose not to participate in an unexpected unanimous decision that it found counter to its self-interest.However, the triumphalist tone (that of the press and OPEC’s official journal) makes sense when in the days after the November agreement the price of a barrel increased by almost 9 percent and reached a peak of $51 in the case of Brent. The optimism for the judgement, as well as for the immediate result, was based on the fact that the November agreement was foreseen in confidential talks that were already in progress. To that end, OPEC’s effort was actually important for publicizing something that had not happened for more than a decade, the creation of production quotas for each country and also establishing a committee to monitor the implementation of production cuts. Immediately after the November agreement, public messages of appreciation and invitation to dialogue were sent to Russia and producing countries outside of OPEC. A good job by OPEC guides ensured that, a few weeks later with the December 2016 agreement, a goal sought for around 15 years has finally united the majority of producing countries to limit production for the common end of relaunching and stabilizing higher prices. This triumph was hailed by OPEC’s official journal with a very significant title, ''OPEC makes history in Vienna'', which suggests a proud sense of regained global influence. The agreement unites 24 of the largest oil-producing countries to cut approximately 1.8 million barrels per day (bpd) from the beginning of 2017 for an initial period of six months, a time which may be extended for another six months. Although we are not yet at the end of the first quarter, the results seem to justify the decision. If we simply consider only the price issue, it has increased from a depressing $31.79 per barrel in January 2016 to $53 in January 2017, an increase among the highest in recent years and a growth of 45 percent in value, the largest growth since the beginning of the global crisis in 2009. Obviously, it is not all roses - we have briefly reported on a very difficult negotiation, especially within OPEC itself, for this is a story of a group that has always suffered from difficult relations, more within itself than with non-producing or non-member countries.
Old issues resolved
The will for a general agreement hinged on overcoming old, unresolved internal issues within OPEC. Saudi Arabia’s willingness to engage Iran may prove difficult as, after the years of the embargo, Iran is racing to recover influence in all international political and diplomatic areas, and given that ambition it may not only refuse to adhere to the negotiated cuts but may even increase its production to approximately 3.9 million barrels per day. The purpose, according to Saudi Minister Khalid Al Falih, who was one of the main creators of this agreement, first within OPEC and then with non-OPEC countries, is mainly to build a long-term collaboration with consultations and coordinated interventions on the market to avoid the bad results of the last two years, in which OPEC was kept on the sidelines of almost all energy decisions while the price of the barrel collapsed. Now, although certified by these agreements, OPEC only controls a part of the oil supply and, therefore, in some ways it cannot go back to being the key player it once was. But it no longer needs to assume 100 percent of the costs, having made a ''transparent'' agreement and a comparison before the world with the other producers that often avoided energy, environmental and social discussions of an international nature. This is certainly a good political result for OPEC. In terms of political forecasting, it is also a good result considering that, while the countries of the organization traditionally experience internal conflict, especially due to Islamic radicalization, their agreement now includes more stabile non-OPEC countries. But political stability issues remain. Less optimistic economic analysts predict that soon, in the haze of the relations of non-OPEC countries, there may be a risk of recovering production, a surge which would produce a downward drive in oil prices. Then we need to consider the effect all this will have in conjunction with Donald Trump’s presidency.
What will happen in the U.S. and Saudi Arabia?
For political affinities, Trump certainly represents all the major oil producers of his country, and he can only view positively a measure that may well do a favor to the U.S. According to economic analysts, the rise in oil prices can revive American shale producers. At the end of December, Bloomberg revealed that a rise in prices would have allowed producers to use the complicated American technology necessary to reappear with confidence in the market. The U.S. produces approximately 8.8 million barrels per day and has returned to the production levels of two years ago, even with only one-third of active wells compared with the maximum possible collection points. Again, according to Bloomberg, since May 2016, almost 200 extraction points have been relaunched in order to act in advance on both the presidential electoral challenge and because a possible agreement within OPEC was envisaged. Currently, shale production is at 4.5 million barrels, according to several analysts and, with a further jump of around ten dollars, a production of 5.5 million barrels a day could be reached, which would certainly not be a good result for OPEC. Donald Trump will certainly not discourage this situation. We wonder, therefore, if we are faced with a ''win-win'' scenario or whether the agreement will simply place OPEC in the limelight over the coming months. Which refers, again, to a political game involving several countries. The OPEC agreement has, for the first time in years, united Saudi Arabia, Iran and Iraq, and has also enabled countries in difficulty to ease domestic tension in the marketplace. Russia, knowing that this new situation will benefit the U.S., will use new talks to reach a stabilization agreement. The truth is that the country taking the biggest political gamble is Saudi Arabia, which has agreed to be responsible for almost half of the cuts. The Kingdom has ended the trade war with Iran that started at the end of 2014, perhaps even resulting in a partnership in the field of nuclear power. Venezuela is getting back into the game, having suffered, more than others, severe economic damage from the fall in crude oil prices. Putin’s Russia sees a possible additional political/economic opportunity, one that it will duly exploit. Europe must continue to diversify sources of energy and maintain political strength if it wishes to oppose a possible U.S. - Russia rapprochement related to energy source prices. However, we must not be fooled by appearances. The fact that Saudi Arabia has focused so much on the agreement is due to the fact that its establishment has made room for a strong drive to diversify economic sources and to have a future with less, or even no, oil. In 2017, both the OPEC agreement and the decisions of COP 21, confirmed in COP22, are now both operational. These paths will not necessarily be different and divergent. In fact, it is conceivable that they will be long, interdependent and that the most diplomatically savvy and most economically flexible countries will take advantage of both opportunities. Thus this will be an interesting year.