Opec+ decided on Thursday to delay undoing its production cuts, yet again. When the group started the additional reductions in October 2022, Brent crude stood at about $93 a barrel, but it closed on Friday at $71. What if the oil exporters had done things differently two years ago?
Oil analyst Rory Johnston raised this question. He is well-placed to ask, hailing from Canada, one of the main contributors to global production growth since then. The output cuts from Opec+ allowed production outside the group to rise, and its market share to drop, while prices have clearly not risen either. Inflation of about 5 per cent since October 2022 has further eroded the purchasing power of oil revenue.
When Opec+ introduced the cuts of two million barrels a day, oil prices had fallen to below $100, from about $120 a barrel in July of that year. Prices had been elevated then because of the fallout of Russia’s invasion of Ukraine. They then fell as worries about actual supply disruptions dissipated, the global economy weakened, and central banks raised interest rates to control inflation.
As most Opec+ members were struggling to produce up to their targets, the burden of cuts was actually borne by Saudi Arabia, the UAE and Iraq. From May 2023, the group surprised the market by introducing additional voluntary cuts, of about 1.16 million bpd, with the load again falling primarily on the same three countries, with contributions from Kuwait and, outside Opec, Kazakhstan and Oman.
Russia had earlier said it would reduce output by 0.5 million bpd from February 2023 in response to western sanctions, a move it continued. In June 2023, Opec+ agreed that it would extend the curbs into 2024, and Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, unveiled a further surprise, a unilateral “lollipop” cut of another one million bpd. This February, Saudi Aramco said that it had been instructed not to go ahead with raising its production capacity from 12 to 13 million bpd.
Opec+, at several subsequent meetings since June last year, has looked ready for planned production increases, only to call them off at the last moment. Opec’s output in October was just short of 27 million bpd.
At any or all of these points, the gathering of oil ministers from member countries could have chosen differently: not to impose cuts, or to ease them. Higher production would have meant, of course, lower short-term prices. But would the long-term payoff have been worth it?
Imagine this. In 2022, the core Opec decision-makers – Saudi Arabia, the UAE and Kuwait – know their fiscal position is comfortable. Buoyed by strong revenue earlier in the year, they can tolerate a period of reduced earnings.
As prices dropped towards $90 that October, Opec announces it is satisfied with the current market balance and will continue unwinding the unprecedented 10 million bpd of cuts made during the coronavirus pandemic. Stronger supply will help ease inflation and boost the world economy.
The three politically-troubled members – Venezuela, Libya and Iran – are not bound by targets, and have little choice but to agree. The argument within Russia over production levels seems to have been won by Rosneft chief Igor Sechin, who is against limiting output as his company wants to develop its big prospects in East Siberia. Logistical issues related to sanctions, though, mean that Moscow can’t boost exports much.
By early 2023, crude prices have fallen to the mid-$50s a barrel. Journalists excitedly write stories about a “price war”, but the Opec secretary-general denies this, noting that all members have agreed to the policy.
When BP chief executive Bernard Looney resigns in September 2023, investors ask his successor to stay the course on low-carbon investments. With strong competition from Opec national oil companies, and only moderate prices, it doesn’t make sense for BP and peers to pursue growth in output.
And in the same month, when Chevron announces it will buy rival Hess, the deal is all about synergies and cost-saving, not expansion. In October, ExxonMobil says it will delay a decision on developing the 250,000 bpd Whiptail project in Guyana.
The post-Covid rebound in world oil demand is easing off, but 2024 is still a strong year, with consumption growth of 1.8 million barrels a day. The Chinese motor is humming along reasonably, inflation eases in Europe and the US, central banks cut rates and Europe has a decent economic year. Demand is particularly strong in India, where usually price-sensitive consumers add half a million barrels of oil use each year.
Policy measures still promote electric vehicles in China, Europe and the US, but with pump prices quite cheap, consumers are happy to keep buying petrol cars.
US shale output, having expanded by only about 300,000 barrels a day in 2023, is flat in 2024. Election slogans of “drill, baby, drill” fall flat as the industry has no enthusiasm to invest further. After suffering a third price plunge in a decade, shareholders are tired of promises of jam tomorrow: they want capital returns. North of the border, expensive Canadian heavy oil producers, too, are focused on trimming costs.
As permitted Opec production levels steadily rise, Saudi Arabia, the UAE and Iraq gain most of the benefit in increased production. Angola had muttered about leaving the organisation in January, but decides to stay in despite struggling to produce up to its limit.
By late 2024, prices have crept back up to the low $70s a barrel. Opec as a whole is producing 29 million barrels per day, with Saudi Arabia contributing 10 million bpd of that and the UAE 3.5 million bpd. Iran and Russia still have to offer sizeable discounts to find Chinese buyers. At its December meeting, Opec+ confirms it will stay on the course of steady output increases.
So, in this imagined world, prices by now are about the same, output is higher – and crucially, Saudi Arabia and the UAE have gained most. Two years of lower revenues have required some belt-tightening, but the group now enjoys higher overall oil demand, and less competition.
Events might not have played out exactly like this: oil markets and prices are fickle, crises and shocks ever-present. But it’s a useful thought experiment, as we wait for the next meeting in February to see whether Opec+ will get back on the path of regaining market share.
Robin M Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis
