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OPEC’s high prices have accelerated move away from oil to gas

Oil markets
By Paul Hodges on 10-Dec-2014

BP gas Dec14Does OPEC have a future?  Or has it already disappeared as an effective force in oil markets?  I am not the only one now asking this question.  Saudi Oil Minister Ali al-Naimi asked the same question in the summer, suggesting OPEC Ministers should instead meet once a year, and have occasional videoconferences, adding:

We don’t need a meeting. People come and make nice when at the end of the day, Saudi Arabia carries the burden of balancing the oil market.”

Recent events have shown Naimi meant what he said.  He understands that major oil producers need to monetise their product quickly, as it is likely much of today’s vast reserves will end up being left in the ground.  This has already happened with coal, after all.

Nobody today worries about the potential for coal shortages set out in the Club of Rome’s famous 1972 Report, ‘The Limits of Growth’.  And the chart above, based on BP data, suggests oil will likely share coal’s fate:

    • Consumption of oil (red line) and gas (blue) were both growing at similar rates from 1965-75
    • Both were gaining market share versus coal in relation to total energy demand (green)
    • But OPEC’s high oil prices from 1973-1985 gave gas demand a major boost, which has continued ever since
    • The record prices seen since 2005 have further boosted gas and reduced oil consumption
    • They have also encouraged rival oil producers: OPEC’s now has a 42% oil market share versus 51% in 1974

EM energy Dec13The second chart from ExxonMobil’s 2013 ‘Outlook for Energy to 2040’ places these trends in a longer-term context.

  • Wood (brown) was the major fuel 200 years ago, but was then replaced by coal (orange)
  • Over the past 50 years, oil (green) has become the major fuel, but it is now being replaced by gas (red)
  • In 50 years, gas may well be rivalled by renewables, hydro-electric or nuclear as alternative fuels

So OPEC faces a future where its product, oil, is now inevitably losing market share to gas.  It made a terrible mistake by allowing prices to rise to unaffordable levels in 1974-1985.  And since 2005, it has repeated the same mistake.

Energy users have choices, after all.  Large numbers have chosen to abandon oil for gas or other fuels.  Those still tied to oil have been able to reduce consumption by improving energy efficiency.

Even the US has finally moved to adopt European fuel efficiency standards for its auto fleet.    Since 1980, US passenger car fuel economy has risen 27%, from 26 mpg to 33 mpg.  And this trend is accelerating as today’s more efficient cars replace older models.  The standard for new vehicles will be 35.5 mpg (15.09 km/l) in 2016.

Equally important is that most OPEC countries have been busy undermining its own oil production quota system:

  • They have built large numbers of oil-based refineries, as well as oil/gas-based petrochemical complexes
  • Those using oil effectively increase the country’s oil exports beyond its official quota
  • Those using gas increase its total energy exports, effectively cannibalising oil’s share of the energy market

Naimi has another reason for abandoning OPEC today, namely the growing geopolitical threat to Saudi and the other Gulf Co-Operation Council (GCC) countries.  The GCC are surrounded by potential enemies, all of whom would love to take a share of its current oil wealth.

In these circumstances, they cannot possibly continue to allow high prices to destroy the rationale for the US defence shield on which they have depended since 1945.  I will look at this critical issue in more detail tomorrow.