The great danger for any major producer is that you start to believe your own propaganda. And this is OPEC+’s problem today. It has forgotten the key lesson from former UK premier, Margaret Thatcher – “you can’t buck the market.”
There are plenty of warnings from history to remind OPEC+ of the risk it faces. The most relevant comes from the long-serving former Saudi Oil Minister, al-Naimi. He warned in 2015, as oil markets peaked for the penultimate time:
“Saudi Arabia cut output in the 1980s to support prices. I was responsible for production at Aramco at that time, and I saw how prices fell. So we lost on output and on prices at the same time,” al-Naimi said. “We learned from that mistake.”
Unfortunately for Saudi and OPEC+, the lesson was learnt – and then forgotten.
As I noted in the Financial Times in 2017, Saudi had adopted its Vision 2030 policy with the bold statement:
“Within 20 years, we will be an economy that doesn’t depend mainly on oil . . . We don’t care about oil prices — $30 or $70, they are all the same to us. This battle is not my battle.”
But then the oil price collapse at the start of the Covid pandemic led Saudi and OPEC to back-pedal, as the chart shows:
- In the short-term, its output quotas and the post-lockdown recovery turned the market around
- Russia also joined OPEC to form OPEC+ and oil prices soared to $120/bbl
Russia’s invasion of Ukraine then added to the pressure, as energy supplies were cut:
- Saudi could have worked with Ukraine and its allies to mitigate the problems
- It had supported its customers many times in the past, proving itself a reliable supplier
- But instead, it chose to double down on the new alliance with Russia
Chemicals are the best leading indicator for the global economy. And as the I.C.I.S. data confirms, the industry has been unable to pass through the new high prices since last summer.
Demand for the major products has cratered. The Global Index is down 28% from its summer peak. In turn, oil prices themselves have come under pressure – falling from $123/bbl last May to $75/bbl on Friday.
Prices are particularly under pressure in the important US market, as the chart shows. And with US natural gas prices at more normal levels, they are adding to the pressure on oil.
Even last weekend’s Saudi decision to cut output by a further 1mbd had little impact. Prices closed lower on the week.
And the longer-term outlook seems equally difficult for OPEC+.
Its support for Russia means that concerns over energy security are now turbocharging the Net Zero-related need to reduce the use of fossil fuels. As noted here in March 2022:
“The International Energy Agency (IEA) also emphasises that the war highlights the need to move decisively away from the use of fossil fuels. Its plan to achieve Net Zero targets set out the direction of travel last May.”
The good news for consumers, as the chart shows, is that this new policy is actually now saving them money. A new IEA Report last week suggests the move to renewables will save European consumers €100bn in 2021-23.
This confirms that the technologies needed for the energy transition are all available and well-proven. Wind, water, solar and storage can comfortably deliver the cheaper and more reliable energy supply needed to support the global economy.