Counting the cost ... for 100,000 energy workers

OPEC Bulletin Commentary March 2015

Looking back over the past half century or so of OPEC’s existence, one can easily understand why the global petroleum sector has earned the reputation of being a boom-bust industry, characterized by instability and sporadic volatility. At varying times, the international market for crude oil, perhaps the most complex, sensitive and unpredictable of all commodities traded today, has witnessed both high and low price extremes, bringing in their respective turns perceived yet perhaps misconceived advantages for the industry’s principal stakeholders — the producers and the consumers. Previous thinking was that when crude prices were low, it was the consumers who reaped the benefits; alternatively, when they exceeded a certain level, it was the turn of the producers to smile.
However, years of experience of operating at both ends of the spectrum have taught us that actually no one really gains from excessively high or low prices — there are just too many elements involved and knock-on effects to consider. OPEC recognized this from day one. In fact, its five Founding Members came together in September 1960 to defend their sovereign rights as a result of crude pricing issues. And since that day, the Organization, through its policies, has endeavored to establish and nurture a market that is stable, with prices that are fair and reasonable — for all the parties involved.

To the Organization, it makes perfect business sense to have a win-win situation for all the going concerns that have a vested interest in the global petroleum sector. Hence, its longstanding commitment to dialogue and cooperation with the industry’s principal stakeholders, aimed at bringing about a better understanding of the main issues involved.

Happily, a good deal of progress has been made on this front with many of today’s pressing issues up for discussion at various workshops and seminars organized under the umbrella of the International Energy Forum (IEF). There is little doubt that the Forum has managed to bring producers and consumers closer together.

However, looking at oil price developments over the past eight months, there is clearly still a lot to do. Whether one is a producer, consumer or investing oil major, planning for the future becomes a precarious, almost impossible task when having to factor in an oil reference price that is prone to wild fluctuations. The price of international crude has been halving since the summer of last year. This has been brought about by a combination of factors led by oversupply and exacerbated by the actions of speculators. The industry is already counting the cost. Projects worth billions of dollars have been cancelled and much-needed investments for future capacity additions put on hold. Worst of all, Bloomberg, quoting figures by Swift Worldwide Resources, has reported that more than 100,000 energy workers have lost their jobs. Oil service companies, panicking over what the future might hold, have quickly retrenched. And this at a time when the international oil sector is having to cope with the so-called ‘retirement tsunami’, where the industry already stands to lose many of its experienced personnel, especially engineers.

With its chequered history, some would say this is just typical behaviour of a market that is just entering another of its cycles. But in this instance, could it not have been avoided?

We are often reminded that in today’s multilateral world, where continents, regions and countries are increasingly becoming interconnected, there is little room for unilateral action, especially in the vast and intricate world of commodity trading. Today, operating purely through self-interest is quite simply frowned upon. As the old adage says, a problem shared, is a problem halved.

Yet, when it comes to the supply of petroleum, there is a stubborn willingness of some non-OPEC producers to adopt a go-it-alone attitude, with scant regard for the consequences. These parties consider producing to the maximum as being the norm. To them, rationalizing the development of one’s precious natural resources in keeping with market demands appears to be an alien concept.

This same self-interest and unilateral thinking could not be more apparent today with the advent of the ‘game-changing’ tight oil, which has taken the market by storm over the past few years. Make no mistake — this unconventional source is a great and welcome addition to the world’s potential oil wealth. But the timing of its exploitation is certainly questionable. The facts behind the market oversupply speak for themselves.

Fact: OPEC crude output has been stable over the last nine years. Production has averaged 30 million b/d, with zero growth.

Fact: Over the same period, non-OPEC production — led by the US and Canada — has surged by 6.3m b/d. In 2014 alone, growth was measured at over 2m b/d compared with 2013.

In the past, OPEC has often shouldered the burden of ensuring oil market stability alone. In the current situation, which should be of great concern to ALL, is it not time for this burden to be shared?

OPEC Bulletin March 2015

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