The oil cartel OPEC will soon be old enough to retire, but will oil be phased out as the world embraces the green revolution?
OPEC+ made two big news headlines within the last week: hosting the biennial ninth OPEC International Seminar in Vienna and taking a decision on July 5 to accelerate the rollback of production cuts even further, despite concerns about the possibility of weaker prices later this year. As we approach the sixty-fifth anniversary of OPEC’s founding on September 14, 1960, perhaps it is worth thinking about the ways in which the incentives for cartel behavior in the world oil market have changed.
OPEC seminars are big events, with hundreds of attendees, and represent a large part of OPEC’s efforts to shape public and market opinion about the future of oil. Among the attendees are not only the oil and energy ministers of member states and OPEC+ participants, but also top officials from major consumer economies like India and CEOs of the major global oil companies, both Western and Asian.
The core message this year, as in previous years, is that oil will be used far into the future and should not be thought of as a commodity that is being phased out. In that regard, the broader global zeitgeist is catching up with them, as many observers are now coming around to the idea that the notion of an “energy transition” was overblown and that renewable energies are mostly additive, rather than replacing existing demand for fossil fuels.
The specific forecasts put out by the OPEC Secretariat and showcased at the seminar go well beyond that optimism, however. OPEC’s official forecast projects global oil demand at 106.3 million bpd for 2026, a short-term pathway that keeps being revised steadily downward with each annual revision as demand growth fails to meet their expectations. But in the long term, OPEC projects it will reach 122.9 million bpd by 2050.
That suggests an annual growth of more than a half-million bpd over the next twenty-five years. If that trajectory is, in fact, what ends up happening in the coming years, it could be enough to raise the “call on OPEC+” despite the strong potential growth in US and other non-OPEC+ production. That concept denotes the amount of OPEC+ volume the market needs to make up the gap between non-OPEC+ production and global consumption.
The OPEC Secretariat stopped publishing a “call on OPEC+” number in their monthly forecasts in 2024, since they kept getting revised downward and underscored the fact that non-OPEC growth was more than covering global demand growth.
The International Energy Agency (IEA) has displayed a bias that is a mirror image of that, questioning in its 2020 forecast whether oil consumption would ever recover to its pre-COVID levels. Their short-term outlook keeps getting revised upward, but they always have peak demand arriving very soon and show consumption dropping off significantly after that. Both views have been wrong in recent years.
OPEC has become more aggressive about managing public and market perceptions in recent years, denying access to their events to a number of reputable analysts and journalists based on what they have said or written. This time the ban list included the reporters covering the oil market for some of the top names in journalism: Bloomberg, the Financial Times, the Wall Street Journal, the New York Times, and Reuters. All of those outlets have at some point run news stories or opinion pieces that have questioned the OPEC+ party line. This defensiveness is counterproductive, in my opinion.
This brings us back to the question of whether or not the key OPEC+ governments believe the Secretariat’s forecast. There are differing views, of course, but only a few of them really matter — those that are holding back production significantly below capacity, like Saudi Arabia and the United Arab Emirates, and a few others that could invest in new capacity if they wanted to do so.
The recent decisions on production policy suggest that the core decision makers are not so sure. The July 5 meeting decided to accelerate the rollback of production cuts even further, adding 548,000 bpd to quotas for August. This came even as the price surge fueled by concerns about the military clashes between Israel and Iran rapidly ebbed away after the US strikes at the end of the campaign.
The scramble to reclaim market share rapidly suggests that the Saudis, at least, are skeptical that the “call on OPEC+” will ever go up very much again. And they therefore have accepted that they will have to endure a period of prices below the long-term equilibrium in order to slow non-OPEC+ growth enough to wedge their volumes back into the market. The actual production volume from OPEC+ will not go up quite as much as the quotas do, because many participants in the deeper cuts made in 2024, including Russia, have seen their capacity decline due to low investment. Thus, the Saudis are grabbing back market share not just from non-OPEC+ countries but from other OPEC+ participants.
If they really believed that demand growth would be as strong in the future as the OPEC secretariat’s long-term forecast predicts, they might be less willing to undergo the short-term financial pain of lower prices.
About the Author: Greg Priddy
Greg Priddy is a Senior Fellow at the Center for the National Interest and does consulting work related to political risk for the energy sector and financial clients. Previously, he was director of global oil at Eurasia Group and worked at the U.S. Department of Energy.
Image: Shutterstock/Maxx-Studio
