OPEC’s Current Strife Offers Glimpse of More Pain to Come
Many of the world’s oil capitals are experiencing a summer of discontent and it could be a glimpse of their future, Yahoo France said in a report.
From Baghdad and Algiers to Caracas, many of the world’s oil capitals are experiencing a summer of discontent.
Iraq has seen fatal protests as its electricity grid buckles amid searing heat, while Venezuela’s oil production has sunk to a 75-year low. In Algeria’s capital, tension is simmering as the hardship of virus lockdowns brings the risk of renewed demonstrations and riots.
The report said OPEC has revived oil from its historic drop but prices near $40 are still far too low for most members as they grapple with weak economies, unstable governments, restless young populations, and the ravages of climate change.
As the legacy of the pandemic and the switch to cleaner energy threatens to keep crude prices lower for longer time, there are profound consequences for the way oil-rich countries are run.
Head of commodity strategy at RBC Capital Markets LLC, Helima Croft, said “The shaky six of OPEC — Algeria, Iran, Iraq, Libya, Nigeria, Venezuela — are facing a very precarious political and economic outlook.” OPEC’s revenue is down about 50% from a year ago, and members’ long-running financial ailments are coming to the fore.
Oil-dependent Angola is seeking to increase a $3.7 billion International Monetary Fund loan by $800 million. The country and Nigeria have devalued their currencies as a shortage of foreign exchange hammers local businesses. Iran — battered by the twin shocks of U.S. sanctions and the virus — and neighboring Iraq have also reached out to the IMF.
Even Saudi Arabia isn’t immune, rolling out a slew of austerity measures last quarter while contending with the tripling of its budget deficit to 109.2 billion riyals ($29 billion). The strain has been showing for a while now.
Last year, popular revolts forced the resignation of Iraqi Prime Minister Adel Abdul Mahdi, and ended the 20-year rule of Algeria’s Abdelaziz Bouteflika.
The prospects for petro states have dramatically shifted from just a decade ago. Oil prices were near $100 a barrel then and consumers were worried about supplies running out. Now, OPEC is increasingly reckoning with the prospect of peak demand, when consumption starts to decline as wind and solar power become more popular.
International Energy Agency (IEA) expects this turning point in the history of the industry could be just about a decade away. Covid-19 could make it even sooner.
In May, BP Plc boss Bernard Looney said that remote working could erode the need for transport fuels and speed up the shift from hydrocarbons.
Having consumed about 100 million barrels of oil each day last year, the world’s thirst for petroleum may never be as intense again.
“The pandemic will accelerate many of the technologies and behaviors that were going to come anyway,” said Amy Myers Jaffe, managing director of the climate policy lab at Tufts University’s Fletcher School of Law and Diplomacy. For governments reliant on oil sales, the implications could be grave.
“The idea that we’re going to have some up-cycle that lasts for a decade, and produces oil prices between $80 and $100, and all these countries can collect up the rent again — that seems less likely,” she said.
Still, oil is likely to remain a major energy source for years to come. The timing of peak demand is widely contested, with some forecasting it’s unlikely for the next couple of decades at least. For oil to be displaced, billions of dollars of spending are needed for vehicle electrification and renewable energy.
Some exporters are using the downturn to diversify their economies. Saudi Arabia is pursuing reform, with its “Vision 2030” program seeking to develop other sectors such as tourism and technology.
But the plan is being thwarted by spending cuts and a struggle to attract foreign investment. And for countries such as Iraq, Nigeria and Venezuela, which lack the kingdom’s deep pockets, the challenge of reform may prove insuperable.
The Saudis may be content to see oil prices remain subdued a little longer, being keenly aware that another rally would only revitalize rivals like the U.S. shale industry, which has squeezed the kingdom hard over the past decade with a flood of crude, and could do so again.
Hitting the competition could buy OPEC some breathing space. American drillers have been laid low by the latest crisis, and other major companies including Exxon Mobil Corp., are scaling back investments, threatening to create in a supply gap in a few years that OPEC would need to fill.
By Chibisi Ohakah, Abuja