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OPEC: Unsettled by new realities of oil production

Ali Haider Saleem discusses the changing trends in oil production due to the pandemic. In order to tackle the worldwide collapse in demand, OPEC+ initiated a record supply cut of 9.7 million barrels per day (bpd) from May 1, 2020. The decision created friction between OPEC members.

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The economic slowdown imparted by the coronavirus pandemic resulted in drastic measures as countries adjusted their economic activities. Lockdowns and travel restrictions created excess energy supplies which needed to be curtailed. Saudi Arabia, the de facto leader of the Organization of Petroleum Exporting Countries (OPEC), along with Russia suggested that the U.S. and other non-OPEC oil producers should also curb their production.

In order to tackle the worldwide collapse in demand, OPEC+ initiated a record supply cut of 9.7 million barrels per day (bpd) from May 1, 2020. Later on, the production was increased but the economic environment remained uncertain and some countries suggested that they would prefer if the production was kept low.

Given the higher cost of shale oil production, the U.S. was deeply concerned with plummeting oil prices and pressured other oil producers to cut down production. The former U.S. President Donald Trump thanked the leaders of Saudi Arabia and Russia after they agreed to bring oil production down. Their decision was not only influenced by Washington though. The economic uncertainty was perhaps the greatest concern and these highly oil-dependent economies could not risk a collapse of the industry.

Read more: Trump signals end to price war as Oil prices rocket over 30%

The global energy market has always been subject to price wars but the coronavirus pandemic even caused friction between closest allies. The United Arab Emirates also cut down its oil production in the wake of the pandemic which placed enormous pressure on its economy.

Earlier this month, the Energy Minister of UAE, Suhail al-Mazrouei, stated that “everyone sacrificed but, unfortunately, the UAE sacrificed the most, making one-third of our production idle for two years”.

The UAE government insists that the production can be raised further as the world is getting vaccinated and economies are recovering. However, Saudi Arabia is not on the same page and urged for more caution. The Saudis believe that the global economy is still in a fragile state and if the production is increased too soon then the market will be disturbed.

Read more: OPEC oil production falls as Saudi Arabia slashes output

A compromise on oil production?

Earlier this month, talks broke down on raising OPEC+’s oil production as UAE contested for a higher quota. According to reports, UAE and Saudi Arabia have reached a compromise that would allow UAE to raise its production from 3.17 million bpd to 3.65 million bpd when the pact expires in April 2022. Oil prices have been rising in recent months so the oil-importing countries are hoping that this would lead to a reduction in prices.

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The UAE was looking for a higher quota and will be restricted to 3.17 million bpd until April which leaves the possibility of further conflict. Moreover, UAE has plans in place to boost its production capacity to 5 million BPD by 2030 so it is very likely the two sides will lock horns again.

For now, it seems that Saudi Arabia has taken a temporary step to quench rumors regarding the friction within OPEC but other OPEC and non-OPEC oil producers are also displeased with OPEC policies as they are losing out on higher revenues. Furthermore, if oil prices continue to rise then U.S. shale oil producers would be encouraged to increase their supply in the international market which would squeeze out OPEC’s share.

Read more: Oil producers remain reluctant to cut production despite crushed oil prices

IEA’s stance

According to International Energy Agency (IEA), “oil markets are likely to remain volatile until there is clarity on OPEC+ production policy. And volatility does not help ensure orderly and secure energy transitions – nor is it in the interest of either producers or consumers”.

The cooperation between OPEC members will continue to be tested in the future as new realities are emerging. Coronavirus cases are on the rise again in many parts of the world which will halt global recovery. In addition, the pandemic has raised further awareness about the deteriorating health of our planet which subsequently intensifies the push towards greener energy resources.

The IEA’s Executive Director, Faith Birol, stated in May 2021 that “if we want to reach net-zero by 2050 we do not need any more investments in new oil, gas, and coal projects”. This statement cannot be taken lightly by the oil producers as previously IEA used to be criticized for underestimating the role of renewable energy and backing environmentally unfriendly policies.

Read more: Can Pakistan overcome energy shortage with coal?

In 2019, Andrew Logan, senior director of oil and gas at Ceres called out the IEA for undermining the fight against climate change. “They project ever-increasing demand for fossil fuels, which in turn justifies greater investments in supply, making it harder for the energy system to change,” he said.

The turnaround in IEA’s stance will be a huge blow for the fossil fuel industry and would raise further tensions between OPEC members who are likely to face more constraints in the future.

Ali Haider Saleem has worked with the Institute of Strategic Studies Islamabad (ISSI) and National Defense University (NDU). His research interests lie in sustainable development, regional integration, and security cooperation. He has studied public policy at Queen Mary University of London and economics at NUST, Islamabad. The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.

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