OPEC in the age of climate change
What is good for the climate can be good for OPEC, too.
Thursday’s OPEC meeting in Vienna was widely billed as the most important in years. OPEC ministers decided to resist calls to cut their oil production in response to the fall in oil prices since June. After three years of holding steady around $110 a barrel, oil had dropped below $80. Within minutes of their decision, the price fell by another $5.
This was in large part a contest between OPEC and US frackers for power over the oil market. With the new technology of hydraulic fracturing, US oil production has increased by nearly 50 percent since 2008, after more than three decades of decline. By pushing prices lower OPEC hopes to restrain the growth of the costlier production.
What does this mean for climate change? OPEC’s decision comes just four days before a climate summit opens in Peru, the last before a 2015 deadline to agree on post-2020 climate measures in Paris. In Vienna, the ministers agreed their plans for negotiations in Peru.
On Monday, US President Barack Obama’s climate envoy admitted that a lot of the world’s oil, gas and coal would have to stay in the ground in order to limit climate change. Scientists put the proportion that must be left in the ground at 80 percent of known reserves. Nearly three quarters of global oil is located in OPEC countries.
What oil price is ‘fair’?
The unspoken issue in Vienna was how much of the remaining carbon budget will come from state oil companies and how much from private oil companies. How much from conventional, cheaper oil and how much from “extreme oil” sources such as shale and tar sands?
Venezuela and Saudi Arabia were at the two poles of the debate. Venezuela made the loudest calls to cut production, with the government of Nicolas Maduro struggling to contain popular discontent in light of the country’s economic woes. Before the meeting, Foreign Minister Rafael Ramirez said the market ultimately needed cuts of 2 million barrels a day, and a price of $100 a barrel would be “fair”. Venezuela’s current budget assumes a price at least this high.
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Iran, too, wanted a higher oil price, especially following the failure to strike a deal this week to lift the economic sanctions against the country.
Saudi Arabia, on the other hand, had earlier signalled a willingness to accept lower prices, supported by Kuwait and its other Gulf allies. With lower budgetary needs and large external reserves, they could afford it. And they worried that if OPEC cut production, the higher price would help sustain the current boom in costly, extreme oil production, especially fracked “tight oil” in the US. So, they feared, US expansion would compensate for any OPEC cut.
OPEC’s choice was thus between lower oil prices or a lower share of world oil production. Both sides lobbied hard in the run-up to the meeting.
The very fact of having to make this choice shows OPEC’s fundamental weakness. If it asserts its power to increase prices, it thereby reduces its power over the longer term. So it is not quite the cartel most people imagine. After all, despite possessing over 70 percent of the world’s oil reserves, it accounts for only 40 percent of its oil production.
Thursday’s result is that OPEC clings to its limited market power, but to questionable purpose as it fails to use it to stave off economic crises in some of its largest members.
In other words, Saudi Arabia wins. (In OPEC matters, it usually does.)
If the oil price now continues to fall, that will test the producers of US tight oil, Canadian tar sands and other costly sources. Some may become uneconomic to extract, though analysts debate the real break-even prices.
What oil price is good for the climate?
On the face of it, shutting down some of the extreme oil, which adds to the world’s excess of reserves, could be seen as good news for the climate. Venezuela’s Minister Ramirez told Al Jazeera that expanded US production was “a disaster for climate change”. (However, he did not comment on how OPEC’s reserves square with climate limits.)
The trouble is that any such reprieve from a fracking cutback will be temporary, as those reserves will not disappear. Whenever the oil price increases again, companies will come back to extract them.
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A reduction in US production could only become more permanent if there were active government regulation to restrict demand for fossil fuels. Ironically then, OPEC and Saudi Arabia – generally seen as obstructive in international climate negotiations – might best be able to protect their market share with a meaningful global deal on climate.
So far that’s not on OPEC’s agenda. At UN Secretary-General Ban Ki-moon’s climate meeting in New York in September, Saudi Oil Minister Ali al-Naimi argued against any climate action that would “destabilise the global energy market”. He opposed any climate taxes or carbon pricing, even if only applied in developed countries.
Lower oil prices will also encourage OPEC members to talk more about diversifying their economies away from oil. But history tells us that such talk usually evaporates once the price rises again.
In the absence of a global deal, a higher oil price might have been better news for the climate, as that would make the alternatives to oil look relatively more attractive to consumers.
The vast majority of oil is used in transport, where one of the most promising alternatives is electric vehicles. The largest hurdle for their development is storage of the power. A report by investment bank UBS in August found that battery costs are falling fast. It forecast that running a battery-powered car, combined with solar panels on the roof at home, could be cheaper than a conventional oil-fuelled car by 2025, even without subsidies.
If this is right, it could imply that oil’s days are numbered. Countries like Venezuela might then argue that OPEC members should get the maximum revenue from the last decades of oil extraction – and use that revenue to invest in diversifying their economies.
Whether fossil fuels stay in the ground due to low prices or high prices, OPEC has a role to play. To try, Canute-like, to hold back climate action would be as futile as trying to control the oil market.
OPEC started out in 1960 as a forum to coordinate member countries’ actions in their battle for a fair deal from the “seven sisters” that then ran their oil industries: Exxon, Shell, BP, Mobil, Chevron, Gulf, and Texaco. Via a 1968 “declaratory statement of petroleum policy”, and with the help of rising prices, OPEC ultimately facilitated the nationalisation of most members’ oil during the 1970s.
Compared to its limited role as a cartel, where a short-term boost to price could only have come at the expense of longer-term market share, it was in coordinating that transition that OPEC really proved itself effective.
If OPEC is to make itself relevant again, perhaps it should start helping its members think beyond oil.
Greg Muttitt is the author of Fuel on the Fire: Oil and Politics in Occupied Iraq.