On Sunday, April 17, the world’s largest oil producers gathered in Doha to discuss the possibility of freezing their levels of oil production to bolster prices in the global market for crude oil. Prices have been allowed to fall for almost two years due to supply consistently exceeding demand, and the major oil exporters want to bring a halt to this decline. The deal, which was largely anticipated to stabilise the oil market, collapsed.
At the meeting, Saudi Arabia’s Deputy Crown Prince, Mohammad bin Salman, 30, made it clear that he had taken over from the long-standing Saudi oil minister, Ali al-Naimi, as the most powerful voice on Saudi Arabia’s oil future.
Prince Mohammad refused to agree to a production freeze unless Iran – the only large oil producer not present at the meeting – agreed to the global deal. Iran is the world’s seventh largest oil producer and holds 4 percent of the global market.
Instead of simply refusing agreement, Prince Mohammad threatened that if a deal was not reached Saudi Arabia would increase its oil production from 10.6 million barrels per day to as much as 12.5 million barrels per day. Just the increase alone is more than half of Iran’s entire production capacity and larger than its total oil exports.
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Transformation
Prince Mohammad’s threats came a week before he unveiled his plan to detach Saudi Arabia from its reliance on oil. The plan, called “Vision 2030”, claims that Saudi Arabia will be able to live without oil by 2030. He wants to transform the state-owned Saudi Aramco from a strictly oil and gas company into an energy and industrial conglomerate.
Due to the decline in oil prices, Saudi Arabia is shouldering a budget deficit of 15 percent of gross domestic product. About 82 percent of its government revenue is earned through oil. Mining has been highlighted as a possible route to divestment from oil. Saudi Arabia holds 6 percent of the global uranium reserves and only 5 percent of its mining capacity is being exploited.
But the rippling in the world’s largest oil producer is just the tip of the iceberg. What the shift of focus in Saudi Arabia indicates – even if currently it’s just a bluff – is that the world is starting to adjust to the concept of oil not being its primary energy source.
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The oil debate and all its accompanying analysis used to be dominated by peak oil supply and the inevitable date when it would all run out. No longer. There is more oil than the world knows what to do with and as soon as the wells start running low new reserves are found or new ways of reaching them are invented. The supply of oil is controlled by politics rather than geography and the gates of production are currently wide open.
Energy alternatives
More important is peak oil demand – the day the world uses as much oil as it ever will on one day. Without increasing demand, there is no point in increasing supply capacity. It’s unlikely that in my lifetime I will see the end of oil, but with the increasing availability of energy alternatives and rising pressures to develop environmentally sensitive forms of consumption, I am confident that peak oil demand will occur within the next 15 years.
As we get closer to that day, Opec will fall apart, as controlling supply will no longer provide any meaningful benefit. Either all countries have to agree to supply less than total demand and sustain prices, or all of them will flood the market to grab as much of the demand as they can.
In the wake of the financial crisis it’s playing out already – Saudi Arabia refuses to cut supply unless Iran does, because they know that whatever demand they don’t meet, Iran will.
This is just a taste of what is to come. The sustained orchestration of the oil market is only possible when demand exceeds supply capacity and, as soon as that tips permanently, the market for oil will fragment into a race to the bottom. Exploration will halt and profitability will be driven by innovative cost reduction rather than increased production.
Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein
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