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OPEC+ Isn’t a Cartel, But It Isn’t a Regulator Either

The Saudi energy minister must be kidding when he suggests the group helps keep oil prices stable.

Oil pumping jacks, also known as "nodding donkeys", operate in an oilfield near Almetyevsk, Russia, on Sunday, Aug. 16, 2020.
By Liam Denning
November 05, 2021 | 05:26 am

Bloomberg Opinion — Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, is right: OPEC+ is not a cartel. But it sure isn’t a regulator either.

His comment during Thursday’s press briefing after the organization’s latest meeting was undoubtedly aimed at U.S. Energy Secretary Jennifer Granholm, who earlier this week blamed the “cartel” for rising gasoline prices. Granholm, with an eye on her boss’s approval ratings, surely chose her word pointedly.

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But OPEC+ defies such easy categorization, as its identity and objectives morph over time. The closest the original OPEC got to being a cartel was in the 1970s, when it controlled more than half of global oil production. But it rarely held discipline and often looked more like a political club. Over time, waves of non-OPEC production, with North American shale the most recent and consequential, beat the club’s market share down to less than 40% — which is precisely why it roped in others under that supposedly temporary “+” rebranding.

Now the group is having a moment because of what’s happened in the world around it. A strong recovery in demand as the pandemic recedes has coincided with subdued non-OPEC+ supply growth, especially in the U.S. Meanwhile, weaknesses among several OPEC+ members, notably Angola and Nigeria, mean the group isn’t even producing to its full quota. And this is where the prince’s narrative about energy markets begins to look more dubious.

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AbS, as he is known, used his platform Thursday not merely to rebut Granholm’s characterization but also to launch a broadside against Western energy policy in general. He highlighted the relatively stable price of oil compared with surging natural gas this year as proof of OPEC+’s positive role. And, no doubt with an eye on climate negotiators gathered in Glasgow, he criticized the perceived negativity directed at fossil fuels, blaming it for a lack of investment in “energy security.” Above all, the entire event constituted an extended rebuff to calls for higher oil production from some governments, not least that of President Joe Biden.

On one level, AbS is right: There’s not much point in enacting policies that inhibit oil production if you aren’t shifting demand at the same pace or faster. That’s a recipe for price spikes, suffering and election defeats (or worse). A release of barrels from the U.S. Strategic Petroleum Reserve now appears all but certain, even if its impact will probably be limited. (Oil doesn’t move as quickly as White House press releases.)

Yet the notion that today’s tight market is due to the ESG — environmental, social and governance — lobby is preposterous. Shale producers are clambering out of a grave marked “shareholder returns” that they spent the best part of a decade digging themselves into. Their restraint reflects an effort to fix the “G” more than the “E”. As for OPEC+, it has always constrained investment and production as a means to affect inventories, and therefore prices, or simply because it lacks the wherewithal to raise output.

Ambitious climate targets will influence investment in energy supply as time goes on, and that carries an inherent risk of imbalances. Yet when oil producers bemoan climate targets as unrealistic, one must ask: What’s the alternative? No targets? That doesn’t work given the scope of the climate problem. Less ambitious targets? That undercuts urgency, the need for which owes something to the long campaign of misinformation about climate funded in part by, yes, oil producers. It’s an imperfect world.

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AbS says producers can’t be expected to invest in output that may be needed only for years, not decades. But why not? Western majors such as ConocoPhillips have already adopted a financial framework that matches this new paradigm. Surely OPEC+ producers’ low costs allow them to weather any plateauing of oil demand; last men standing and all that?

Except the truth is that most of them, Saudi Arabia included, might well have cheap barrels but also have expensive calls on the rents from those barrels. As my colleague Julian Lee has noted, there is a disconnect between the group’s touted flexibility and its unwillingness to accelerate production even when prices are demonstrably high.

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OPEC+ lacks real flexibility because many of its members’ economies are overwhelmingly dependent on oil. Contrasting oil’s relative serenity compared with gas and coal, AbS at one point implied those markets would be better off with some sort of regulator, a term he also used to describe OPEC+. He must be kidding. OPEC+ exists to further the interests of its members, not to act as neutral arbiter. And at crucial times — not least the 2008 price spike and the early 2020 Saudi-Russian price spat — those interests haven’t aligned too well with stability. Thursday’s gathering didn’t meet the moment either.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.