HomeOp-edOPEC+ faces global challenges as COVID-19 lingers
By Mohammad Alsabban
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December 21, 2021 1:59 pm

OPEC+ faces global challenges as COVID-19 lingers

Western double standards risk reducing production levels
OPEC+

Historically, the world has never experienced an alliance which can calibrate, and to a large extent, control a global market’s performance, like that of the ‘OPEC+’ alliance. 

The 23-member energy alliance’s beginnings, nearly three years ago, were not encouraging, amidst a price war between its lead members, namely Russia and Saudi Arabia. 

However, all members understood soon after, that their interest lies in their cooperation and that they must coordinate their steps in order to achieve stability in the energy market when it comes to such a vital and strategic international commodity, which is oil.

At the peak of the Covid-19 pandemic, which brought the world to a near standstill and disrupted global trade, the alliance was quick to prove its efficiency by slowly, and with calculated steps, withdrawing the surplus in the global oil market. 

OPEC+’s move led to a gradual improvement in oil prices, which had turned negative at one point, and balance between the supply and demand was achieved. 

The alliance’s oil production resumption came in parallel to the recovery in global demand for oil thanks to the gradual global economic recovery pushed by vaccination campaigns against the Covid-19 virus.

As time elapsed, OPEC+’s members started showing a higher degree of commitment, led by the decisiveness of the alliance’s leadership, represented by Saudi Arabia and Russia, who made it clear that there will be no room for “a free passenger” who does not abide by what OPEC+ agreed to. With that, everyone else fell in line.

And looking at the past three years, it seems that this alliance will likely continue to thrive, as long as there are countries that export oil.

However, the number of members in the alliance may shrink from its current 23 states, not because a member does not wish to continue in the alliance, but because some members’ productive capacity has been diminished. This is particularly true in the case of two countries: Angola and Gabon, and with that, we may witness a gradual withdrawal from the coalition.

Moreover, the road ahead remains bumpy and full of challenges, against what some may assume otherwise.

Despite the homogeneity and coordination among its member states, this alliance continues to face numerous obstacles, including pressures from major oil consumers.

Such pressures are severe enough to be perceived as direct threats. Add to that the fact that any draw from the alliance’s strategic oil reserve represents an unprecedented step, which contradicts with the main goal of its existence. One has to note that such a reserve was never used to reduce oil prices, but rather to confront any disruption in the global oil supply.

All of the aforementioned threats were dismissed at one point or another and the impact of drawing from the alliance’s strategic reserve was, and continues to be limited. And OPEC+ continued to achieve more successes, relying on its clear readings of the markets and scientific methods to draw its decisions.

OPEC’s HQ in Vienna -OPEC

On the other hand, the success of this alliance has caused envy among the world’s natural gas producers. Some gas producers even expressed their wish to have a similar alliance, which would guarantee balance and stability in the gas market balance. This is imperative in light of political interventions from Western countries. Perhaps the clearest example on such interventions is having a country prohibiting one country from exporting crude to another, merely over political differences between the first country and the importing country.

As for the biggest challenge facing OPEC+, in addition to the remainder of the oil and gas producers and exporters, it is represented in the induced structural change —known as the “energy shift”— with the transition to clean energy, and attempts to phase out the reliance on fossil fuels represented by coal, oil and gas. The pretext for such a transition is “potential climate change.”

It is true that confronting potential climate change is a noble goal, but it has been mixed with a malicious agenda by some Western countries, whose leaders often voicing their intent to eliminate oil imports, during international conferences. But the catch here remains that they never speak of eliminating coal, and would rather focus on oil and gas. The fact that coal pollutes the environment more than other hydrocarbon products, raises the question as to why those Western nations would exclude it from their crusades against hydrocarbon products.

If we want to summarize the nature of the demands for the gradual phase-out of oil in particular, we find that they focus on the following:

First: The West’s desire to get rid of oil is not new. In fact, it dates back to the seventies of the last century. Fifty years have passed so far, yet we have not seen any transition materializing. The reason is simple: There are no economically viable alternatives to current energy sources, despite the technological leap which we have witnessed in the alternative energy sector.

Second: The existing tax bias against oil in such countries, where tax rates range anywhere between 20 percent  and 65 percent  of the total price of an EBPP (equivalent barrel of petroleum products). Whenever the governments of those states propose imposing additional taxes, including a carbon-based tax, we see that it ends with a tax on gasoline only and excludes the rest of the hydrocarbon products, namely coal.

The strange paradox in many Western countries who position themselves at the forefront of the global fight against carbon emissions and pollution, while blaming oil derivatives, is that when it comes to the most polluting source, which is coal, we find that they continue to provide subsidies for this particular product, but they call for cutting back on investments in the oil sector. Such a double standard in handling the file is due to the fact that they have abundant coal reserves. And for that, the West remains hypocritical when it addresses the climate change issue.

Third: There are upcoming suggestions, which will be implemented in the coming period, including the so-called ‘border tax adjustment’ related to imposing fees or taxes on imports of carbon-based goods.

These fees and taxes cover several products including petrochemicals and cement, among others, which adds to the existing bias against oil, the basis of petrochemical products.

Fourth: If we go back to the United Nations Climate Change Conference (UNFCCC) concluded in 1992, which constitutes a bible to all subsequent efforts, we find that it stresses on the comprehensiveness of measures taken to confront climate change. 

Yet, despite UNFCCC’s stipulations, the Paris Agreement adopted at the 2015 UNFCCC, only focused on limiting carbon dioxide, and nothing else, to confront climate change. And even with that, the focus was only on the energy sector and no other sectors. This disregard to the original agreement and double standards in dealing with one resource and not the other, was all the plotting of some Western states. It also shows these countries’ attempts to achieve their own goals and own economic interests from such agreements.

Yellow mining machine drilling in a US coal Site
Coal mining in the US – The US federal government

The West has also canceled a basic principle in the agreement, whereby countries share responsibility, each based on the degree of its own actions. So, instead of differentiating between the obligations of industrial countries and those of underdeveloped and developing countries, where by the polluter pays, the Paris Agreement does not differentiate between those two groups at all. In that sense, the burden created by industrial nations is passed on and shared by other countries.

Fifth: As a result of such changes to the agreement, developing countries have lost confidence in the West. This was reflected in the catastrophic failure to achieve tangible results as per the officials who attended the Glasgow chapter of UNFCCC, held last October. By the end of Glasgow’s conference, the fear was that the international efforts to confront climate challenges may have started to fade away gradually.

Sixth: In light of this international confusion, the International Energy Agency (IEA) has asked those concerned parties to stop investing in oil and gas exploration under the pretext of achieving ‘zero carbon emissions’ goal by 2050. Should that happen, then the world surely faces an international energy crisis, and we have already seen it starting.

As Saudi Energy Minister Prince Abdulaziz bin Salman has stated, the world will lose more than 30 percent  of its oil production during the current decade, because of IEA’s call to stop investments in this vital sector.

Oddly enough, the IEA has not called for a halt on investing in coal. In anything, it reflects an outright bias and open hostility towards the oil and gas sector, and not towards the West’s coal wealth.

Paradoxically, at a time when the IEA calls for cutting off investments in oil, it asked the OPEC+ alliance to increase its oil production to mitigate fuel prices. With that, all has been lost —that is if it had ever existed in the first place— between oil-producing countries and the IEA.

What is worse is that the U.S. administration, headed by President Joe Biden, which withdrew from the Paris Agreement, has stopped demanding the U.S. oil producers of including shale oil producers to curb their production. But the very same administration is asking others to cut their investments in the oil sector outside the U.S…. Once again, talk about double standards and blatant hypocrisy, which paves the way for a real energy crisis in the coming years.

Seventh: Some Western states have politicized energy supplies. The United States and some European countries are calling for ending the licensing of Russian gas supplies via Nordstream-2 pipeline. 

Should that happen, then we will see a shortage in gas supplies that will ignite global gas prices in the first quarter of 2022.

This will also push countries to further rely on coal and oil to compensate for this shortfall in one of the electricity-generating sources. If anything, this defeats the purpose behind calls to fight climate change and unmasks the false pretension of those claiming that by “getting rid of oil, we can fight climate change.” 

The issue of climate change is much more complex than that, and any shortage in investments in fossil fuels, would deprive companies worldwide from their capacity to operate and would lead to one energy crisis after another.

Western countries can easily control via legislation their own companies, and other multinationals from investing in oil exploration. However, they cannot stop national companies elsewhere from doing so, especially that most of those companies are owned by sovereign states, which will not appease Western bias against oil. And should that ever happen in the West, then the arena will be left clear for national companies from elsewhere be it the Middle East or Latin America or the East, such as Aramco and others, to benefit from the successive and expected hikes in international oil prices.

In conclusion, the world must realize that what it calls an energy transition towards clean energy, falls short from the goal to compensate for the shortage in energy supply from its traditional sources (both technically and economically). 

By that, confusing aspirations and dreams with facts on the ground, will only lead to a disruption in “energy security” that the Western world speaks of. 

It will also lead to a global energy crisis, which will have a negative spillover on the global economy, eventually causing an economic stagnation and a harsh winter that the world cannot recover from quickly. 

This is the exact opposite of what the West wants as such a crisis will only strengthen the role of oil and gas producing countries, who, by then, will have greater control over the global energy market.

The West must search for another “pretext” other than “climate change” to realize its dreams of getting rid of oil, and even then, it will not find an economically viable  alternative. So, it has to deal with reality and build a stronger relationship with the oil and gas exporting countries.

In reality, this world can only grow stronger if everyone depended on one another.

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(*) Dr. Mohammad Salem Alsabban, international economic and oil advisor; Former senior advisor to the former Saudi Minister of Petroleum; And former head of the Saudi delegation to the United Nations Climate Change negotiations.