Since 1973, much of global politics has been conducted in the long shadow of the Organisation of Petroleum Exporting Countries (Opec) cartel. That was the year Opec first set its stamp on global affairs by engineering an oil crisis in response to Western governments’ support for Israel in the Yom Kippur War. Prices quadrupled and exports to western Europe, the United States, and Japan were banned altogether. The result was a deep recession and spiralling inflation, the effects of which endured long after the oil embargo was lifted in 1974.
In the years since, the steady flow of petrodollars has propped up authoritarian regimes from Latin America to the Arabian Gulf. Most recently, Opec has played a crucial role in keeping Vladimir Putin’s creaking war economy afloat.
Half a century on from the oil crisis, some things haven’t changed. Relations between an embattled Israel and her Arab neighbours are once again deteriorating; Russia is throwing her weight around in her near-abroad. But where 1973 saw Opec first flex its muscles, there is growing evidence that 2024 will be the year its power is broken, once and for all.
Opec is stuck in a two-pronged trap
Most obviously, its latest attempt to repeat the oil shock has been a damp squib. Despite announcing production cuts of over five million barrels per day (bpd) in November, the oil price is currently around a six-month low. Even the Houthi rebels in Yemen attacking Red Sea shipping lanes hasn’t managed to lift prices above $80 a barrel.
Opec is stuck in a two-pronged trap: global dependence on oil is waning. And, in the meantime, the cartel is losing its grip over world production. One of the most persuasive arguments for Net Zero is reducing our dependence on the oil barons – and this year’s annual report from the International Energy Agency (IEA) perfectly illustrates the case. According to the IEA, nuclear and renewable sources will meet 90 per cent of the total increase in global demand for energy in 2025; in the same time, it predicts that renewables’ share of the worldwide power generation mix will rise from 29 per cent to 35 per cent.
In the United States, the Energy Information Administration reports that more half of all extra generating capacity created in 2023 will have come from solar. Here in the UK, renewable electricity generation grew seven per cent on the same period last year due to increases in capacity and more favourable weather conditions. As a share of total generation, renewables outpaced fossil fuels for the fourth consecutive quarter. Overall, both Europe and America are ramping up clean energy generation. That trend is only going in one direction.
By itself, this would not pose a problem for Opec until at least the 2030s; the world is not going to wean itself off fossil fuels overnight. Yet the cartel is also losing its grip on production – thanks, in large part, to its own short-sighted policies.
Years of artificially high prices, for example, have created a big incentive for western energy companies – which are driven by shareholder interest – to invest in increased production. That investment is now paying off in a spectacular way.
Last month, the United States set an historical record for oil production: 13.2 million barrels per day. American output is so strong that it is currently exporting the same amount of crude oil, refined products, and natural gas liquids as Saudi Arabia or Russia – winning allies overseas and keeping a lid on global prices.
Norway already increased production by eight per cent in 2022. This June it went further: citing the need to bolster European energy security. The government signed off 19 new oil and gas projects. In January, it issued 47 new exploration permits, with plans for another 92 in 2024.
Meanwhile Qatar, which sits outside the axis of Gulf states at the heart of Opec, is busy expanding development of the North Field Project, the world’s largest gas field. By 2027, it plans to increase output of liquified national gas (LNG) by 60 per cent: more than 126 million tonnes per year.
In 2023, it signed three 27-year deals to supply LNG to the Netherlands via Shell, France through TotalEnergies, and Italy via Eni with all three coming online in 2026. This follows a 15-year deal to supply Germany through ConocoPhillips.
All four countries have been seeking to diversify away from Russian gas which had accounted for almost 40 per cent of supply in the EU before Moscow’s invasion of Ukraine.
This pressure is now causing cracks in the Opec+ alliance. Its members were never united by much beyond a shared interest in rigging oil prices. Now it can’t do that, the fundamentally conflicting interests of its members might tear it to pieces.
Just this month, Angola – a major oil exporter – walked out of the group. This followed the November production cut, in which Opec’s leadership tried to impose the bulk of quota reductions on African nations to protect the output of core members such as the United Arab Emirates. More nations may follow Angola out the door.
Why do something so obviously counter-productive? Because countries such as Russia, Saudi Arabia, and Iran are so reliant on oil exports that they can only cut production so far, even in pursuit of higher prices. Not only did they need a broad alliance to rig the markets, they also needed other nations to bear a disproportionate share of the costs of slashing output.
Angola’s departure ought to shatter any illusions about the viability of such a system. The consequences could be profound.
In Latin America, Nicholas Maduro’s warmongering regime in Venezuela is utterly dependent on a global price of $100 a barrel or higher (far above today’s level) to keep its run-down oil industry afloat.
In Russia, oil and gas sales account for almost a third of all government revenue, and the Kremlin’s tax receipts closely track the price of Russian crude. Yet Moscow’s export receipts have declined almost every month since early 2022, and the revenues of its largest producers declined 41 per cent in the first three quarters of 2023.
Iran, meanwhile, is predicted to be heading for an historic budget deficit after realising only 42 per cent of its expected oil revenues for the year. Tehran’s budget estimates were based on an anticipated price of $85 per barrel; a real price of even $81 is enough to plunge its finances into disarray.
Just think how different things would be if Opec were still at the height of its powers. A real energy shock would inflict a major blow on all western economies, while leaving the likes of Russia and Iran flush with cash to divert to their militaries or networks of proxies.
Instead, the West has finally called their bluff. By ramping up domestic oil and gas production while committing to the transition to clean energy, we are breaking Opec’s stranglehold on the global economy once and for all.
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