With oil prices down by some 70 percent from mid-2014 and touching multi-year lows, economies across the globe are gradually adjusting to the New Oil Normal and the massive transfer of real income from oil producers to oil consumers, with Middle East oil exporters losing $390 billion in export revenues in 2015.
At its meeting in Doha earlier this week, the Organization of Petroleum Exporting Countries (OPEC) failed to reach agreement on stemming the hemorrhage in revenues.
For the past 40 years the Gulf Cooperation Council (GCC), led by its biggest producer Saudi Arabia, acted as swing producers, able to control prices. But the oil market has changed radically from the days OPEC was formed in the 1960s.
New Energy Supplies: Shale and Renewables
In its heyday, the market share of OPEC producers revolved around 50 percent when there were few alternatives to fossil fuels.”
Now OPEC supplies around 30 percent of the world’s oil: New sources of oil have emerged.
The shale industry has emerged: over the past five years, around 4.2 million barrels per day (bpd) have been added from North America’s shale producers.
Although accounting for only 5 percent of global production, shale has had a determining impact on the market.
Shale oil producers are using new technologies to access resources formerly considered too hard and costly to extract. The cost of extraction has fallen sharply—so much so that some wells can make money with prices around $40-$45 a barrel.
OPEC has opted for a predatory pricing strategy to drive out shale oil producers out of business. Indeed, some two thirds of U.S. shale oil rigs have shut down.
But the survivors will bide their time. In 2015, the world produced 96.3 million bpd of oil, of which it consumed only 94.5 million bpd—meaning that each day about 1.8 million barrels went into storage tanks.
Saudi Arabia, Russia and Iraq are pumping at close to record levels.
Libya is gradually returning to the market, while the lifting of international sanctions on Iran promises to bring an additional 600,000 bpd, and to send oil prices down to their lowest levels since 2003. But oil is facing competition from the revolution in renewable energy: solar, wind, water, geothermal and bio-mass.
Renewable energy has made enormous strides: A record $329 billion was invested in clean energy in 2015, despite persistently low oil prices.
The cost of solar power has declined by more than 70 percent since 2009, while modern wind turbines produce 15 times more electricity than the typical wind turbine in 1990.
Renewable energy has become competitive with fossil fuel and is becoming ubiquitous.
The ongoing energy storage technological revolution will accelerate the use of renewables: the cost of energy storage is expected to drop to $100 per kwh in the next five years, against $250 now.
In turn this favors electric vehicles, with recent research forecasting that they will represent up to a quarter of all cars on the road by 2040.
The bottom line is that increased supply from shale along with substitution and competition from renewable energies imply downward pressure on oil prices and OPEC’s resources.
Moving to a Decarbonized World
There is also growing downward demand pressure. Emerging markets, led by China, that were the main engine of global growth since the Great Financial Crisis have slowed down. China, the world’s second biggest economy that had been growing at double digit rates, has slowed to below 7 percent growth, leading to lower growth in demand for oil and commodities.
The pressure is compounded as China rebalances its economy, moving away from energy-intensive heavy industry and investment toward consumption and services (while investing heavily in renewable energy), the fuel-hungry giant’s need for oil is on a downward trend.
Energy Efficiency and COP21
The world is also becoming more energy efficient: transport, buildings, industry, services are all more energy efficient.
The Organization for Economic Cooperation and Development (OECD) countries’ energy consumption is now as low as it was in 2000: while Gross Domestic Product (GDP), grew by 26 percent, energy consumption per capita declined by 9 percent. As a result of growing innovation and investment in energy efficiency, countries are decoupling economic growth from energy consumption growth.
Emerging economies, again led by pollution conscious China, are also investing in energy efficiency. The global trend is for lower energy utilization to produce GDP.
The world has also woken up to the imminent calamitous consequences of climate change resulting from greenhouse gases and rising global temperatures.
COP21 commitments imply gradual decarburization, a downward shift in demand for fossil fuels and substitution towards cleaner fuels such as gas and new investments in renewable energy, energy efficiency and clean energy generation capacity.
We are living the end of the oil age and the decarburization of our economies and societies.
The New Oil Normal Signals the Demise of OPEC
The demand and supply fundamentals underlying the New Oil Normal have permanently altered the structure and dynamics of the oil market.
The oil world that OPEC helped build is defunct. The raison d’être of OPEC has been overwhelmed by structural and technological change and innovation.
To quote former Saudi Oil Minister Sheikh Zaki Yamani: “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.”
OPEC has a dim future: Shale oil producers are now the marginal producers amid vocal dissension and discord within OPEC as to how to deal with the reality of the New Oil Normal and the growing competition from renewable energy in a world facing climate change calamity and increasingly committed to decarbonize.
Oil prices are likely to remain depressed over the medium and longer-term.
The future is for decarbonized economies, increasingly reliant on renewable energies. OPEC should transform itself into the Organization of Renewable Energy Countries (OREC).
Dr. Nasser Saidi is a leading economist who served as Lebanon’s Minister of Economy and Industry and Vice Governor for Lebanon’s Central Bank. He is also the former Chief Economist and Head of External Relations at the DIFC Authority, former Executive Director of Hawkamah and chair of Clean Energy Business Council.