Disagreements between Opec members have been a feature of the oil cartel since it started just over 60 years ago.
But what has happened in the past week stands out not just because it came against a backdrop of rising prices or because it pitted traditional allies Saudi Arabia and the UAE against each other. It stands out because it is a preview of what is to come.
On the surface, members fell out over how the group calculates an individual country’s production targets. The UAE believes it has been short-changed by the supply deal in place since April last year, when the pandemic was crushing demand.
One layer below that is the UAE’s increasing assertiveness on the global stage. In particular, it senses that its oil alliance with Saudi Arabia has been usurped by Riyadh’s increasingly close relationship with Moscow, since Russia joined the expanded Opec+ group in 2016.
But the heart of the issue is far simpler, and it’s one that’s roiling the entire oil sector: the growing belief that peak in demand for crude is not so far away.
For big oil producers such as the UAE, which believes it still has vast untapped reserves, the incentive is shifting towards getting those barrels out of the ground and monetising them as quickly as possible.
This is the real existential threat to Opec’s strategy in the long run. A group founded to maximise their oil reserves’ value by (at times) restricting output is witnessing a shift in the very definition of what maximising value means for the industry.
If oil demand is going to peak within the next decade or so, as many in the industry increasingly accept, then the old calculations start to change.
Opec itself argues that oil demand will be around for a long time to come. But there’s a huge range of forecasts for just what that means. Some oil watchers predict output will peak but then plateau at levels roughly the same as today. Others expect that when the peak arrives, the subsequent fall in demand will look more like a drop from a cliff edge.
The International Energy Agency has a range of scenarios that suggest oil demand in 2030 could be about 105m b/d, about 5 per cent higher than it was before the pandemic. Or, if governments really do get aggressive in tackling climate change, it could fall as low as 85m b/d.
That 20m b/d swing between the strongest and weakest scenarios is roughly the equivalent of Saudi Arabia and Russia’s combined current output.
The energy consultancy Wood Mackenzie believes that under aggressive climate scenarios — of the type required to meet the targets of the Paris climate agreement — oil prices could fall from about $75 a barrel today to about $40 a barrel by 2030. By 2040 that declines to about $30 a barrel and below $20 a barrel by the 2050s.
So while the timing of the Opec+ fall out might have caught the market unawares, the fact that largely unseen tensions are straining the group should not be seen as a surprise.
For the wider oil industry, it’s another sign of the huge uncertainty that has brought a sense of paralysis to many investors in the sector. But for those oil-producing countries where state-backed operators control the majority of supplies and reserves, paralysis is not an option.
Faced with uncertainty over whether the oil you depend upon will be as valuable in the future, many are concluding that plans to pump as fast as possible may be the best of a bad set of options.
The Abu Dhabi National Oil Company has already invested billions of dollars — and partnered more closely with international energy majors — to boost its production capacity from about 3.5m b/d in 2018 to 4m b/d today. By 2030 it should be closer to 5m b/d.
But the UAE isn’t pursuing this strategy in isolation. It is simply further along the curve.
Saudi Arabia itself has discussed raising production capacity, from about 12m b/d to 13m b/d or higher in the near future. Russia, too, is trying to attract billions in investment to develop and expand the Vostok oil project in the Arctic.
This does not automatically mean that the taps will all be opened at once, when the additional production is built. Opec’s premature obituary has been written many times before.
A plateau in demand in the 2030s would still give Opec+ a huge market to manage. Even if oil demand falls sharply then Opec members, many of whom have some of the lowest production costs in the world, are likely to outcompete rivals for a larger percentage of what’s left.
But increased inter-group competition is almost inevitable. And those Opec+ members that can boost production capacity will inevitably want their output targets adjusted higher, just like the UAE.