Prepare to celebrate Opec’s demise
By Roger Altman
Last weekend the leaders of the G8 issued a statement warning darkly of oil market disruptions. Apparently, they misunderstand this market because their statement missed the point by a wide margin.
The threat of disruptions is actually diminishing, given new finds of unconventional oil and gas in the western hemisphere. These discoveries will reduce price and supply volatility. They will also reset and profoundly improve international relations. The days of Opec, the oil producers’ cartel, are numbered. Unstable oil states, from Iraq to Venezuela, will be marginalised. The G8 statement on oil should have been optimistic.
Technology has led to a revolution in energy supply. Advanced seismic techniques and complex drilling methods have opened previously unknown or inaccessible deposits. As a result, the US now has a 100-year supply of natural gas. On the oil side, production in the US, Canada, Brazil and possibly Mexico is projected to grow sharply. All of these nations might rank among the world’s seven largest energy producers within the next 20 years. Oil production could match consumption across the western world for the first time since 1952.
This will provide for more stable oil and gas markets. They will become larger, deeper and less vulnerable. Geopolitically driven disruptions will have less impact and will be less common. No embargo, such as the one that Arab states imposed in 1973 or Iran enforced in 1979, will be severely disruptive. Nor will output losses triggered by conflicts, such as those in Iraq and Libya, have such effects. Put simply, the list of stable producers will be longer, making the impact of any rogue state more limited.
Deeper oil markets should also mean less day-to-day price volatility over the medium to long term. After all, oil is increasingly traded like a financial instrument, and the world’s deepest financial markets, such as US Treasury bonds, tend to exhibit the least volatility. Further, the potential for traders to engage successfully in manipulative behaviour will be diminished by the sheer size of the energy markets.
This supply resolution will also realign the global political order for the better. First, the geopolitical centrality of the Middle East will wane. That is because the power and relevance of its oil producers have peaked and are heading down. Whether Iraq is producing a million barrels of oil more or less is not going to mean much in 10 or 20 years. Only Saudi Arabia’s output will be indispensable. The idea of Opec as a cartel, already fading, will be over. This will lead to different security arrangements in the region.
The longstanding US military presence in the Gulf, always a lightning rod, will be reduced. Washington’s only remaining priorities there will be the stability of Saudi Arabia and Israel, both already heavily militarised. Moreover, the coming budget austerity in Washington will support such defence cuts.
Second, the global leverage of other power-hungry oil states, such as Russia, will also weaken. These nations will be marginalised by surging oil production in the west and in countries such as Indonesia. For example, Russia’s capacity to shut off energy supplies to Europe will diminish as America becomes an exporter of liquefied natural gas. This, together with its falling population and weak economy, will put Russia into further decline.
Third, US energy policy will increasingly be preoccupied with relations in the western hemisphere. Brazil, in particular, may emerge as one of the world’s strongest economic and financial players. This focus could well result in a free-trade zone throughout the Americas.
Fourth, the implications for China are serious. Its oil imports are projected to rise from 4m barrels a day to 12m b/d. The country may eventually have to import 80 per cent of its energy. But China is already the biggest customer for Middle Eastern and African oil and historically these have been unstable regions. As western protection for the Middle East diminishes, China will step into the vulnerability that the US is leaving behind.
After the second world war the west led the world in energy production. That disappeared as the west’s production stagnated. Its consumption soared and Middle East production rose, bringing instability along with it. Exports flowed from east to west. Now this flow is reversing, markets will improve and the G8 should be cheering.
The writer is chairman of Evercore Partners and a former US deputy Treasury secretary |
