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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a director of Surrey Clean Energy, a former oil trader and a visiting lecturer in the department of engineering at the University of Oxford
Opec is facing the greatest challenge since its inception. The world needs to stop burning oil and limit global warming below 2C, along the lines of the Paris Agreement by nations on climate change. The general consensus is that oil use needs to shrink by as much as 80 per cent by the middle of the century if we are to meet the Paris goals. The impact of such a fall will be devastating for many oil producers.
Opec must help its members to navigate the treacherous waters of energy transition. The organisation should be promoting what two of its wealthy members, Saudi Arabia and the United Arab Emirates, are already doing — working hard on diversifying their economies.
Such a role for Opec is nothing new. The early political ideas of the late 1950s that led to creation of Opec in 1960 were not just based on the desire of oil producers to control their own natural resources. Economic co-operation, technical assistance and a unified approach to formulating energy policy were also very important, early aims of the organisation.
The main goal of Opec — liberating oil resources from the yoke of the foreign, neocolonial oligopoly of the international oil companies — was achieved by the end of the 1970s. This was a massive win for the member countries and something they should be proud of.
Having enjoyed the rocketing demand and high prices of the 1970s, Opec turned to defending its windfall economic rents and supporting an oil price well above the cost of production. At a conference in Vienna in 1982, the organisation agreed to limit production by imposing individual quotas for each member country, thus officially becoming a cartel. Since then, Opec has generally been successful in keeping the price well above a competitive market level.
Officially, Opec accepts the reality of climate change. But in practice, it vehemently opposes calls for phasing out fossil fuels. The cartel projects demand to keep on growing to 116mn barrels a day by 2045 and calls for an increase in investment to meet this demand. These actions are totally incompatible with the goals of the Paris Agreement.
It appears that Opec is following the strategy of the tobacco industry — financing a campaign to prolong the shelf life of its product, a move that has become known as a “predatory delay”. It is stimulating demand in countries without adequate policies to protect the environment. At the same time, the Opec leader, Saudi Arabia, appears to support keeping oil prices as high as possible, for as long as possible, while using the proceeds of high oil revenues to diversify its economy as quickly as possible.
This strategy is unlikely to work for a number of Opec countries — Nigeria, Venezuela, Angola, Congo, Gabon, Algeria and others. These countries are highly vulnerable to revenue shortfalls and have government budgets dependent on oil prices.
Opec could play a pivotal role in helping them steer away from relying on fossil fuel revenues and diversifying their economies towards other sectors of the economy and cleaner sources of energy, often abundant in most petrostates.
The Opec secretariat is well placed to play the key role in this process. It has excellent staff and resources. In conjunction with other international bodies such as the IMF and the World Bank, it can advise on improved sustainability, optimal transition paths and economic stability.
Some members such as Saudi Arabia and the UAE are already engaged in environmental projects such as the Oil and Gas Climate Initiative, a consortium of some of the world’s largest state and multinational oil companies. There is also the International Petroleum Industry Environmental Conservation Association, in which Abu Dhabi National Oil Company and Aramco are involved. And Aramco has signed up to a World Bank programme to reduce zero flaring — the process of burning off gas to relieve pressure during oil extraction — to zero by 2030. But rather than engaging in sustainable initiatives individually, the whole organisation should participate.
It is time for Opec to play a positive role. Rather than being an obstacle to the energy transition, Opec could be a part of the solution — a force for good, with a legacy of not only wrestling the ownership of its resources from the neocolonial power of the oil majors, but also helping its members overcome the hardships of the inevitable energy transition.
