Opec unlikely to succeed in boosting oil prices

THE upcoming meeting of the Organization of Petroleum Exporting Countries (Opec) in Vienna on Nov 27 has been billed as likely to be one of its toughest yet, and with good reason. Whatever happens at the meeting, there is little prospect that the cartel's fortunes will revive anytime soon. And while that is, of course, not good for Opec, it would be a net positive for the global economy.

Oil prices, currently at less than US$80 per barrel for Brent crude, are at four-year lows. The decline (about 28 per cent so far this year) has both cyclical and structural causes. Cyclically, the slowdown in China's economic growth, the continued weakness in Japan and Europe, and the strengthening of the US dollar have all been negative for oil - as well as other commodities. Structurally, the cartel is up against a combination of the shale revolution in the United States, which has sharply reduced US dependence on Opec oil, and the increasing proliferation of renewable energy, both in advanced economies and in China.

Opec's situation is further complicated by divergent interests within the cartel as well as significant levels of production from non-Opec members such as Russia and Norway. Some of the more fiscally stretched Opec countries - notably Iran, Libya, Nigeria and Venezuela - want higher prices and will be pressing for production cuts. But others, including the Gulf states and Saudi Arabia in particular, have a different perspective. They take a longer-term view and are keen to protect their market share. For them, cutting production, while possibly raising prices and increasing revenue in the short term, also encourages additional supply from shale and offshore sources, and further encourages energy restructuring and investment in renewables. They do not see this as being in their interest, especially given that some of the restructuring and energy-switching will be irreversible and the market share of non-Opec oil production - already at around 65 per cent of the total - will increase. Far better, from their viewpoint, to have oil at levels which make shale exploration and extraction uneconomic, and minimise additional production from non-Opec sources.