As per the latest report from the Energy Information Administration, OPEC’s oil export earnings witnessed a substantial surge, reaching $888 billion in 2022
War had a positive impact on OPEC’s performance in the previous year, resulting in the highest haul since 2013. However, upon closer examination, OPEC’s earnings indicate underlying structural weaknesses that have prompted the oil exporter club, particularly Saudi Arabia, to take actions to bolster oil prices, which is of utmost importance to them.
The Energy Information Administration provides an annual estimate of OPEC’s oil export revenue, which revealed a substantial increase to $888 billion in 2022, marking a 54% rise from 2021 and slightly surpassing the total for 2014, when oil prices initiated their mid-decade crash. Nevertheless, these nominal numbers do not provide the whole picture. In real terms, OPEC’s revenue was up 43% from 2021, which is still commendable, but it declined by almost a fifth from 2014. Adjusting for population, the per capita figure for last year’s revenue stood at $2,035, representing a 30% decrease compared to 2014.
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The estimated revenue for the current year suggests a further decline to $1,474 per capita, which translates to a 28% decrease in real terms and is even lower than figures recorded at the beginning of the century.
Why is this happening?
Factors such as inflation and relatively high population growth, with OPEC expanding by over 50% in the past two decades, have strained the value of their revenue. Moreover, a decline in the volume of barrels being exported, despite experiencing a marginal upturn in the previous year, has resulted in export levels remaining below pre-pandemic figures. As a consequence, the actual per capita export revenue for 2022 stands lower than that of 2009. It is worth noting that in 2009, the global GDP contracted, and nominal oil prices were nearly 40% lower than the present time.
OPEC’s market share and influence over prices have been affected by the emergence of rival production, particularly US shale. The debate over whether OPEC is a true cartel has persisted, with arguments against its classification as one based on the group’s periodic efforts to seek new members to formalize its cartel status. This led to the creation of OPEC+ in 2016.
In addition, the relationship between Saudi Arabia and the United States has been under increasing strain in recent years. Tensions arose when the Obama administration showed support for protesters during the Arab Spring, which displeased the kingdom. The situation further deteriorated when Joe Biden, as a presidential candidate, vowed to treat Saudi Arabia as a “pariah” following the murder of journalist Jamal Khashoggi.
Amidst these strains, Saudi Arabia has been forging new ties with Asia, and the United States is now less dependent on Gulf oil production than before. The changing dynamics in the global energy market have led to a shift in the importance of the Saudi-U.S. relationship.
Regarding oil production, OPEC officials have announced a decision to cut production, aiming to stabilize the market ahead of a potential recession. However, some analysts believe that Russia might be involved in influencing this decision. The European Union’s proposal to cap the price of Russian oil in response to the Kremlin’s actions in Ukraine could jeopardize OPEC’s control over oil markets. Notably, OPEC’s announcement to cut production was made in the presence of a Russian deputy prime minister, raising questions about their alliances and the implications for energy markets.
Amidst these geopolitical developments, the backdrop of climate change poses additional challenges. The U.S. and Europe are planning a transition away from fossil fuels, which could pose an existential crisis for OPEC members heavily reliant on oil sales. The threat of climate change further complicates the dynamics of the oil market and raises questions about the long-term sustainability of crude oil sales.
OPEC’s supply, revenue balancing challenges
Saudi Arabia, or OPEC as a whole, still holds the capability to influence the market through supply manipulations, but this approach carries adverse effects for a group that relies on oil for more than half of its overall export revenue (with the median share among members reaching 77% last year).
The art of balancing export volumes with oil prices to optimize revenue has become increasingly challenging for OPEC due to several factors. Firstly, an increasing number of OPEC members are facing challenges with declining productive capacity, caused by war, sanctions, and mismanagement. This has led to a lack of cohesion within the group, highlighted by the significant gap between countries with high and low per capita export revenue.
Secondly, new factors have complicated the management of the oil market. The rise of US shale and the growing adoption of clean technology have resulted in swift responses to higher oil prices, limiting OPEC’s control over the market. Additionally, China’s strategic use of stockpiling creates a monopsony effect, undermining OPEC’s ambitions for monopoly control.
Climate change is also a significant concern for OPEC members, as it suggests an eventual peak in oil demand. This puts pressure on petro states to diversify their economies to prepare for a potential decline in oil demand. Many OPEC nations are facing the challenge of meeting the needs of their growing populations with fluctuating oil revenues while simultaneously trying to transition to more diversified economies. Economic diversification is crucial for the long-term stability of these countries, as a sharp decline in oil demand could disrupt OPEC’s entire economic model.
Saudi Arabia’s actions this year reflect the complexities faced by OPEC. Its Energy Minister, Prince Abdulaziz bin Salman, has taken measures to influence oil prices, making surprise announcements to impact short sellers and push oil prices higher. However, the success of these production cuts has been short-lived, and oil prices have not remained consistently high. There are expectations of tighter conditions in the second half of the year, but the signs of such conditions emerging remain uncertain, partly due to the expansion of spare capacity with every Saudi Arabian cut.
Lowering production without a substantial increase in prices could pose a threat to Saudi Arabia’s economy, potentially pushing it into recession, according to Ziad Daoud, chief emerging-markets economist at Bloomberg Economics. Although around 60% of the Saudi economy consists of non-oil activities such as services, these sectors are still funded by petrodollar-patronage from the state. Electric vehicles theoretically compete with oil that can be produced as cheaply as $20 a barrel in Saudi Arabia. However, in reality, they benefit from competing with higher-cost barrels because Saudi Arabia restricts potential supply to maintain higher prices, which in turn funds various government expenses, including salaries for state employees and large contracts.
Saudi Arabia’s diversification drive amid global disruptions
OPEC faces complex and multifaceted challenges, including the need to diversify their economies, navigate geopolitical tensions among member states, and respond to global concerns over climate change and energy transition
As we approach the midpoint between Crown Prince Mohammed Bin Salman’s announcement to shift Saudi Arabia’s economy away from oil and the 2030 deadline, fundamental economic progress towards diversification appears to be slow. The ambitious $500 billion Neom project, while prestigious, lacks a clear purpose and faces challenges similar to previous unsuccessful grand projects in Saudi Arabia and the region. Furthermore, the share of oil and gas-derived petrochemicals and plastics in Saudi Arabia’s exports increased to 93% in 2022, showing a regression from 2015, which highlights the country’s continued dependence on oil-related revenue.
The desire for economic diversification has also led to rivalry and suspicion, as seen in occasional flare-ups in the relationship between Saudi Arabia and the United Arab Emirates (UAE). While both countries aim to maximize oil profits and maintain regional stability, their differing economic models and approaches to the challenges posed by a decarbonizing world have strained their relationship. The UAE’s successful development of Dubai as a finance and tourism hub, attracting foreign capital, has contributed to the tensions between the two nations.
The onset of the war in Ukraine has provided OPEC with opportunities to capitalize on disruptions in the oil market. However, it has also served as a stark reminder of wider disruptions in the global landscape. The concept of relying on fragile or hostile nations for essential resources is becoming less favourable. Additionally, climate change is driving a re-evaluation of energy sources and their environmental impact. The volatility in this changing environment will likely lead to more price spikes in the oil market, posing a basic challenge for OPEC and its members. They must adapt to these shifting dynamics, all while dealing with inflation, demographic changes, and competition.
Overall, OPEC faces complex and multifaceted challenges, including the need to diversify their economies, navigate geopolitical tensions among member states, and respond to global concerns over climate change and energy transition. The road ahead for OPEC requires adaptation and careful strategic planning to ensure stability and sustainable growth in the face of an evolving energy landscape.
