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OPEC's future blowin' in the wind

OPEC's future blowin' in the wind
Last Updated: Monday, January 5, 2009
Philip Demont
CBC News

The noise generated by the 120 wind turbines turning on the hilltops of the Viana do Castelo region in northern Portugal might not equal that of a soccer-crazy crowd at the Estadio da Luz stadium in Lisbon.

To OPEC, however, the sound from Europe's largest wind farm is as loud and clear as a high-speed train roaring across the western world.

For the Organization of Petroleum Exporting Countries, clean and (sometimes) quiet renewable power — not the sludge that comes out of the Alberta oil sands — is the biggest threat to the 48-year-old oil cartel's prosperity in 2009.

Over the next 20 years or so, wind power, hydroelectricity and more exotic renewable forms of power will be the fastest growing source of new global energy, according to the United States Energy Information Agency.

At 2.1 per cent per year, the increase in renewable usage will far outstrip the 1.2 per cent annual growth in energy liquids — essentially crude oil and natural gas — as a source of the world's power.

The inexorable math of this trend means that as the decades advance, crude oil, OPEC's raison d'être, will become less important in the energy equation.

Of course, as the globe's largest energy source, fossil fuels will continue to be a major — if not the major — power pool for companies and economies.

That is good news for Canada and its huge oil sands, where, as long as the crude price remains above a certain level — $38 a barrel according to a Merrill Lynch report — the region will see some demand for its energy.

It's bad news, however, for OPEC.

The cartel was formed essentially to exercise some control over the world price of crude oil. If oil prices remain in that same range for too long, OPEC's ability to drive crude valuations higher might be in real jeopardy, never mind keeping its members in line.

OPEC already faces problems getting its 13 members to stick to their existing production quotas.

Add slowing economic growth worldwide and the relatively reduced importance of oil, and you have a recipe for exporting countries fighting tooth-and-nail for crude market share, not waiting patiently for higher prices.

In that world, the orderly cartel of the past four decades — in which production cuts invariably led to higher prices — becomes a oil-selling rugby scrum in which buyers call the shots and rogue nations, such as Iraq (the only OPEC country without an output quota) can pump out as much black gold as they want.

"In the short run, that would be great for consumers. In the long run, it would lead to global energy chaos," investment thinker Jim Jubak wrote in early December.

Downward slide since July

Even with a tough 2009 ahead, it is not as if OPEC has been enjoying halcyon times in recent months. Oil prices, as measured by OPEC's reference basket of 13 different types of crude, rose to the top of the roller-coaster in the week of July 11, at $131.22 US.

Then came the stomach-churning slide, as speculators disappeared along with legitimate economic demand. By December, the same OPEC reference price stood at $34.69 — a drop of almost 75 per cent.

OPEC President and Algeria's Minister of Energy and Mines Chakib Khelil speaks at a news conference following a meeting of OPEC ministers at its headquarters in Vienna in September. OPEC President and Algeria's Minister of Energy and Mines Chakib Khelil speaks at a news conference following a meeting of OPEC ministers at its headquarters in Vienna in September. (Ronald Zak/Associated Press)During the price plunge, the Vienna-based association chopped, or promised to chop, 4.2 million barrels from what it sold daily.

Still, oil prices fell.

By the end of 2008, OPEC members actually appeared to meet their national quotas, something only rarely achieved in the past.

Still, oil prices fell.

Various energy ministers of member countries talked about $75 as the target point for crude valuations.

And still oil prices fell.

Now, the organization, which gained its public policy influence during the oil crises of 1970s, faces a potentially disastrous 2009.

Slowing world economic growth combined with a slew of new upstream production projects could combine to reduce per-barrel revenue but still force members to pump as much oil as possible just to meet the demand of their populations.

"If oil prices in 2009 and 2010 average $30 a barrel, that would be a nightmare scenario for the global economy," said World Bank economist Zeljko Bogetic at a London energy conference in December.
OPEC less important

Oil was able to avoid OPEC's attempts at boosting the commodity's price in 2008 partly because what these 13 countries produce comprises less of the total global energy supply now than it did 30 years ago.

OPEC estimates that world crude oil demand for 2009 will reach 85.68 million barrels a day, one million barrels less than what the organization forecast earlier in 2008.

The cartel figures to supply an average of 30.2 million barrels a day, 1.4 million barrels per day less than OPEC's 2008 output and approximately 35 per cent of total demand.

These days, more countries pump more oil from more sources, like Canada's oil sands, than ever before.

That makes pronouncements from OPEC members, such as Saudi Arabia, less important than they once were. Essentially, the cartel's ability to talk up oil prices has disappeared.

From Russia with love

In terms of clout, however, the organization did receive a bit of goods news towards the end of 2008.

Russia, a non-OPEC member, alluded to possible production cuts of 300,000 barrels a day in line with reductions the cartel had been seeking from the world's second largest oil pumper.

As well, Russia hinted that the country might be interested in joining OPEC as a member, a move which would boost the organization's clout in world energy markets.

Russia used much of its higher priced production to pay down foreign debt and might have some ability to cut back on output and wait for higher per-barrel valuations.

More production

As oil prices fell in 2008, so did interest in more exotic sources of petroleum.

In Canada, projects designed to dig out bitumen and separate the oil from the sticky sludge went on the shelf as cash-strapped companies saw less need to invest more money to squeeze out cheaper oil.

That distinctly does not appear to be the case in other producing nations, however, where foreign companies often are loathed to delay projects and risk of getting replaced by another operator.

In other cases, the firms developing the new facilities are actually government-owned, making a delay a potential blow to national prestige.

Oil output Barrels per day
Saudi Arabia 8.8M
Iran 3.8M
Kuwait 2.5M
UAE 2.4M
Source: OPEC Dec. bulletin

Thus, OPEC has about 100 upstream projects on the books in the medium term, all of which would add a total of 5.4 million barrels a day to output by 2010 compared to production levels in 2007.

Relative low-production nations, such as Algeria and Indonesia, have a number of productions ready to come on-stream in 2009.

Then there is Iraq, a country in recovery mode with as many as eight oil production projects on the books for next year.

With the U.S. government under pressure to end the conflict in that country, Washington might have an interest in Iraq pumping out more, rather than less, oil in the short-term.

Sputtering economy

OPEC also faces unique problems from the global credit crunch.

That financial event, which began in September 2008, has sloshed over into the production side of the economy with abandon, hampering GDP growth and economic potential for 2009.

The International Monetary Fund forecasts that the world economy will grow by slightly more than two per cent in 2009, down from a healthy five per cent in 2007.

And that includes countries, such as India and China, which could see their GDPs expand by more than five per cent in 2009.

Other predictions are predicting that the global economy will expand at an even slower clip, in the range of 1.4 per cent.

At that pace, demand for energy by the industrialized economies of the Organization for Economic Cooperation and Development will fall by 1.3 million barrels per day for the first half of 2009, OPEC estimates.

Lower demand for oil leaves OPEC members facing a dilemma: pump out cheaper oil which cannot easily be replaced or watch government revenue dry up while officials wait for prices to rise.

For less populous nations, such as the United Arab Emirates, the concern about maintaining public spending might be marginal.

Volatile nations such as Indonesia, however, with its 220 million people, face continual pressure to maintain public services for their populations.
Environmental concerns

That brings OPEC's future back to the Portuguese wind farm and the accelerating growth of renewal energy.

While alternative oil exploration is driven mainly by higher crude prices, renewable development has been pushed forward by improved technology and increased voter concern regarding the environment.

Some types of clean energy were not possible for years, until machines, like the wind turbines, were built that could actually produce the power.

In addition, voters, especially in developed countries, have become much more concerned about the harm that fossil fuels are doing to the atmosphere and other parts of the environment.

As a result, lower-priced oil is unlikely to become a substitute for higher-priced clean power. People appear more willing than in the past to pay extra for the development of renewable fuels.

That means that while cheaper oil could stop fossil fuel development, the renewable energy train is driven by other concerns.

And how far this vehicle is down the energy track will determine OPEC's ultimate future.


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