The group of oil producers known as Opec has become irrelevant. Amid the most unstable oil supply situation in more than 30 years, it went missing in action.
The 23 countries, which account for nearly 45% of the world’s oil production, met on Wednesday with crude prices surging to their highest levels since 2014. Their virtual gathering lasted just 13 minutes. From the subsequent crowing about the new record set for the brevity of the meeting, you’d be forgiven for thinking the mission was to get together for as short a time as possible, rather than to balance the oil market.
Russia’s invasion of Ukraine and the potential impact on oil markets wasn’t even deemed worthy of discussion. That is a shocking dereliction of duty for a group that considers itself the central bank of oil.
Sure, it would have been uncomfortable. The invasion was launched by one of the group’s co-chairs and keeping Russia in Opec is important for the other members — the last time it pulled out, it triggered a production free-for-all that sent prices plummeting. So there’s an understandable reluctance to raise the topic.
But that hasn’t stopped them before. Iraq, a founding Opec member, twice invaded neighbours — Iran in 1980 and Kuwait a decade later. Both its victims were fellow founding members of the group. When Iraq attacked Kuwait in 1990, the world lost about 4-million barrels a day of supply overnight as a result of UN sanctions on the exports of both countries. That represented about 7% of global production at the time.
The rest of Opec stepped in, using spare capacity to boost supply. Within a month, the group’s total output was almost back where it was before sanctions. That didn’t stop oil prices from continuing to rise though. Much of the market’s nervousness was driven by fears that then Iraqi president Saddam Hussein’s troops would push further south all the way to Saudi Arabia’s oil fields.
Thirty years on, the situation is very different. Far from acting as a stabilising force, the bigger Opec producer group has abstained.
Perhaps it fears some form of retribution from Russia if it says or does anything the country doesn’t like. Or perhaps it has no problem with President Vladimir Putin invading a sovereign neighbour. Maybe the truth is that there’s actually not much that can be done.
Opec doesn’t have anything like the spare capacity it held in 1990. Back then, Saudi Arabia alone was able to boost output by about 3-million barrels a day over five months and still have more in reserve. It might struggle to do half of that now.
Aside from the United Arab Emirates, Opec would be hard pressed to add much at all. It is already struggling — and failing — to keep pace with rising output targets. Production in January was almost 1-million barrels a day below the group’s goal, according to its figures.
Its inability or unwillingness to act might buy oil producers a short-lived burst of sky-high prices, but it will speed the death knell for oil. Consuming nations will surely redouble efforts to decarbonise their economies and boost energy security by reducing dependence on foreign fuels, fossil or otherwise.
Saudi Arabian oil minister Prince Abdulaziz bin Salman has repeatedly taunted the International Energy Agency’s blueprint for decarbonisation as a la-la land fantasy. It’s starting to look as if the oil producers are living in a fantasy land of their own.
More stories like this are available on bloomberg.com/opinion
— Bloomberg
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