In November 2022, InterRegional for Strategic Analysis held a panel discussion entitled "Energy Geopolitics: Understanding OPEC’s Role in the Stability of Global Energy Markets." The panel’s keynote speaker was Cyril Widdershoven, founder of Verocy and head of the Mediterranean Energy Political Risk Consultancy. The following points were discussed during the panel:
Centrality of OPEC
The keynote speaker focused on various points regarding OPEC and OPEC+’s position in the global energy market, including the following:
1. OPEC’s future expansion into renewable energy: OPEC countries would be key to future oil and gas production. Widdershoven stated that he also expected OPEC to turn towards renewable energy and that there would be a power shift in that field as well.
2. OPEC’s increasing control over markets by 2045: Although OPEC controls the oil market, it produces less than 34% of global oil today. It is estimated that by 2045 it will make up around 40% of the market. If these projections are correct, OPEC will maintain its current influence and indeed control more of the market by 2045 than it does today.
3. Concerns about OPEC’s capacity to replace Russian energy: Russian oil and gas travels through the Netherlands via the Port of Rotterdam, one of the largest oil and gas ports in the world. All Russian oil and gas passes through Rotterdam, a key port for selling and buying petroleum and gas products. OPEC will not be able to fill the gap in the market created by the loss of Russian products.
The keynote speaker discussed various facets of energy markets in light of global geopolitical dynamics, including the following points:
1. US and Europe face a major diesel crisis: According to the keynote speaker, Europe will be short 44 million barrels that it usually imports from Russia. Because of European sanctions on Russia, Europe will only have 1-1.5 million barrels of Russian crude oil. This is not much at all, hence the major diesel crisis in the US and Europe at the moment. The sanctions will have a tangibly negative impact on Western countries. Key regions such as Europe do not want to use more oil and gas, as was clear from the Netherlands shutting down the Groningen gas field, after which Europe blamed other regions for failing to provide gas. The US produces 3 million barrels of diesel oil per day, which is less than current demand.
2. Rising global demand for energy for the foreseeable future: Consumption of energy would rise globally, including European energy consumption, in spite of the energy transition and use of clean energy. This is especially true as electricity usage grows, including through mobile phones and apps that run all day and which people feel they cannot live without. Energy demand would rise, especially in Asia. He noted that the whole world was looking to China but suggested this might not be the right move. According to Widdershoven, China will not be a prime mover for markets, at least not before 2045, even though it is trying to solidify its position. There were other key countries such as India that have huge populations of consumers "who all want a little car of their own."
3. Critical investment in energy wanes: While energy demand has grown, supply has fallen over the past eight years. According to OPEC, investment has fallen by $1.3 trillion. If investment had not declined, we would not have the supply problem that the world is currently experiencing. Instead, we are about eight years behind and investments are continuing to fall. This is because people want to focus on clean and renewable energy and use electric cars, while forgetting that 90% of the world’s energy needs are met by oil.
According to OPEC, demand grew in 2021 from 96.9 to 109.8 million barrels per day. Without further investment, production will decline 8-11% annually across all OPEC oilfields. In order words, the $1.3 trillion which was not invested will reduce oil production in these fields; this is why further investment is needed. According to OPEC and the International Energy Agency, $12.3 trillion must be invested in oil and gas by 2045. If this is not achieved, then the supply-demand gap will only increase. Oil and gas is found in everything we own and wear—not only because of gasoline, but also petroleum products and fertilizers. If fertilizer production were to be halted, 40% of the world’s population would be without food within 3 months.
4. Huge capabilities for green hydrogen in the region: The best regions for hydrogen and green hydrogen production were OPEC countries such as Saudi Arabia, the UAE, and Egypt (a former OPEC member). These three countries have enormous capacity to produce green hydrogen. Oil and gas are necessary to build wind farms, etc., and that most people are not aware that oil and gas is required to build anything.
5. Efforts to pursue energy opportunities in the region: The US is generally not seen as an oil and gas producer and exporter, even though it produces more than Saudi Arabia and is the leading producer of oil worldwide. The US has the potential to expand production further but this is unlikely to have much of an impact on Russian production. It is worth noting that the Netherlands once produced half as much oil as Russia and could have maintained this level for 50 years if politicians had not decided to halt production.
6. Repercussions of Ukrainian war for energy and food: The Ukrainian war and sanctions against Moscow had implications beyond natural gas. Gas was not Russia’s only source of profit; it comprised only 20% of the country’s GDP, while the rest came from oil, coal, and nuclear energy. Many people do not know that Russia has nuclear energy. These issues go beyond Nord Stream 1 or 2 running through Ukraine; Russia is chiefly concerned about sanctions on oil, which relates to OPEC.
80-90% of Russian gas would remain outside the market during the coming decade. Russia will not be able to export its oil after 5 December, when sanctions on Russian oil shipments will come into effect. Europe will not be able to access Russian shipments in Greece, and we will see a major shortage of oil in global markets, even if Putin ends the war. These sanctions will last five to eight years. It would be a grave error to believe that the Ukraine crisis caused oil and gas prices to rise because they were already high before Russia intervened in Ukraine. This occurred because there was not sufficient supply on the market, a situation in which the US and OPEC played a role. The sanctions exacerbated and prolonged the crisis, but they did not create the problem. The price of gas in Europe in 2021 was already 500% higher than normal before the war broke out in Ukraine.
OPEC was aware of these dynamics and was investing even when prices were lower. This explains why a single Saudi oil company makes more profits each quarter than Apple, Google, Shell, or BP. Such companies are not planning to relinquish all this money in the coming years. The Netherlands was one of the largest global exporters of food products. Although the country somehow feeds the world, without fertilizer, the Netherlands would only be able to meet local consumption needs.
7. Russia’s inability to store the energy it produces: Russia would not be able to send energy to China because of the sanctions coming into effect. Another major issue is Russia’s inability to obtain the necessary technology from the West to store the energy it produces.
8. Difficulty restoring energy production to 2016 levels: The world pays attention to what OPEC currently produces and what it will produce in the future, because OPEC has always been a major oil producer. However, it is now having trouble keeping up production. There is the issue of overcompliance in a very liquid market, which is worth paying attention to and constitutes good news. This is because there will be someone able to produce what is needed in times of scarcity. For example, when Iran and Iran left the market, Saudi Arabia increased production. This is tied to decreased production capacity in general, and most overcompliance is tied to an inability to carry out production. This seems to be a positive development because Saudi Arabia has given itself quotas it will stick to, which led to market stability. However, OPEC, Nigeria, and others will not be able to return to 2016 production levels.
9. Impossible to impose taxes on oil companies’ profits: Widdershoven indicated in his response to a question about the US administration imposing taxes on oil companies’ profits that Biden and his advisors do not understand how oil markets work. Private oil companies in the US set prices themselves, pay shareholders or put money in the market, and produce more oil so that prices go down. The company makes decisions based on its desire to make a profit. If production increases, profits will fall and shareholders will be unhappy.
The US and Europe are taking a step in the wrong direction because this indicates that the government wants to intervene in a market that is working fine on its own. This will cause investments in the sector to fall due to fears that the government will take part of the profit. If investment in the market has fallen by $1.3 trillion, these taxes will only further exacerbate the problem. According to Widdershoven, this is not the right decision: why do these taxes not apply to renewable energy companies? Investors will find that there are better opportunities in various other sectors such as wind energy. At the end of the day, companies need to make a profit to keep them going during shortfalls.
In conclusion, the panel discussion emphasized the importance of economic diversification. The keynote speaker stated that if Saudi Arabia does not meet its projected production levels, it will encounter various risks and its standing in the global market will recede. If Saudi profits are removed from the market, it will be less able to support other initiatives. It is expected that OPEC’s standing will fall if oil production and demand both decline. This is why economic diversification is necessary. If the region cannot produce oil at the necessary level, shifts will occur in regional geopolitics.