Geopolitical Scenarios In A Post-OPEC World SUMMARY The continuing fall in oil prices over recent weeks supports the view that markets could remain comparatively weak for 2015 as a whole, with prices trading in a relatively narrow range around the $50 per barrel mark. Such an outcome would reduce OPEC revenues by more than $500 billion p.a. or 15% of GDP 1, while conferring an economic dividend to the major importers, OECD, China and India, equal to almost 1% of their aggregate GDP. While a wealth transfer on this scale has superficial attractions for the global economy, the scale of economic contraction facing producers could herald a fundamental re-alignment within the oil exporting community in which a more active n participation could have disturbing longer term geopolitical consequences. The fundamental policy differences that were exposed at OPEC s November conference appear likely to become more entrenched in 2015 as supply pressures grow and translate into a sharp economic slowdown across all 12 member states. OPEC s political polarisation, between the four GCC 2 members and the remaining eight led by Iran and Venezuela, suggests that efforts to co-ordinate production and restore pricing power will fail without the participation of the non-opec oil exporting community. While treaty obligations would probably preclude the three OECD exporters, Norway, Canada and Mexico, from engagement with OPEC in policy co-ordination, the economic interests of other non-opec exporters, including, Kazakhstan and Azerbaijan are more closely aligned with those of some OPEC nations. This paper assesses the prospects for wider co-ordination among these exporters and the potential geopolitical ramifications of such an outcome in what, effectively, would be a post-opec world as we have known it for more than 50 years. THE LOSS OF OPEC PRICING POWER The 51% share of global oil production enjoyed by OPEC prior to the price spikes of the early 1970 s gave it sufficient pricing leverage to propel revenues more than 20-fold between 1970-1980 but as fig 1 shows, this period represented the apex of OPEC s control over oil markets. Since 1970, OPEC s market share has fallen by more than one-third to 33% of global output and, despite OPEC s forecast of a slight increase to 36% in the period to 2040, the technological revolution in fuel efficiencies in tandem with exploitation of unconventional resources may render even these modest projections to be optimistic. 1 Source: World Bank & OPEC 2 Gulf Co-operation Council, comprising Saudi Arabia, Kuwait, United Arab Emirates & Qatar. (GCC also includes Bahrain and Oman, which are not OPEC members)
Page 2 MMb/d 120 100 OPEC Share of World Supply, % 100 90 80 80 60 40 20 Other Sources of Liquids Supply OPEC Crude 70 60 50 40 30 20 10 0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Source: OPEC World Oil Outlook 2014 Figure 1. OPEC Share of World Oil Supply, 1970-2040. Recent data illustrates that these longer term trends have continued since 2012 as fig 2 shows - while OPEC crude output has remained steady at around 30 mm b/d, global supplies have increased by c2.5 mm b/d, due mainly to higher production in the USA and. With significant additional capacity scheduled to come on stream, notably in Brazil, Iraq 3 and Kazakhstan, it may be several years before OPEC begins to see any rise in market share or pricing leverage. OPEC Crude Production, MMb/d 31 World Supply, MMb/d 93 30 92 29 91 28 90 27 89 26 Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 Source: OPEC Monthly Oil Market Report December 2014 Figure 2. OPEC vs. World Oil Supply, 2012-2014. Nov 2013 Dec 2013 Jan 2014 Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014 Sep 2014 Oct 2014 Nov 2014 88 3 Iraq remains presently excluded from the OPEC production quota system.
Page 3 THE ECONOMIC DIMENSION OPEC s basket oil price fell 51% to $51.91 4 in the second half of 2014 and if this price level is extrapolated to 2015 as a whole, the loss of an estimated $535 billion in OPEC export revenues, or 15% of combined GDP, will impose severe economic constraints across the 12-member group (see Table 1). Similarly, non-opec exporters, such as and other former Soviet states, will suffer losses commensurate with many OPEC exporters and, with the exception of the GCC countries, most lack adequate financial resources to shield their economies from the repercussions of a sharp fall in revenues. While Saudi foreign exchange reserves of $740 billion at end-2013 equate to $24500 per capita, Iran s $68 billion equate to only $880 per capita and cover less than 12 months imports. 5 Table 1. Economic Impact of Lower Oil Prices on OPEC & Selected Non-OPEC Countries. Annual Net GDP * Annualised Cost as Oil Exports 2013 Net Cost of %GDP 2013# Price Fall** MM bbls (US$bln.) (US$bln.) OPEC Exporters Kuwait 961 176 52 29 Angola 621 124 33 27 Saudi Arabia 3,084 748 166 22 Iraq 854 229 46 20 Libya 273 74 14 20 Qatar 631 203 34 17 UAE 1,048 402 56 14 Algeria 434 210 23 11 Iran 568 369 31 8 Venezuela 674 438 36 8 Ecuador 102 94 6 6 Nigeria 723 622 39 6 Totals 9,973 3,589 536 15 (wtd ave.) Selected Non-OPEC Exporters Azerbaijan 299 74 16 22 Kazakhstan 548 232 29 13 2,730 2,097 147 7 Norway 584 513 31 6 Colombia 259 378 14 4 #BP Statistical Review of World Energy, 2014 *World Bank Data based on current prices ** Based on "OPEC Basket" price fall of US$ 53.70per bbl between July 1st, 2014 - January 1st, 2015 The negative prospects facing many oil exporters will be magnified by a comparatively poor record in attracting foreign direct investment. Most OPEC countries have had only limited success in diversifying their economic dependence on oil and gas due either to geopolitical disturbance as in Iraq and Libya, international sanctions in the case of Iran or xenophobic economic policies in Venezuela and Algeria. Similarly, the imposition of sanctions against will compound the effects of that country s economic reversal. The economic headwinds arising from falling oil prices and weak foreign investment in the coming years coincide with strong population and oil consumption growth within OPEC countries. The 43% growth in OPEC s population since 2000 6 has had a corresponding impact on domestic oil consumption, which at 9 MM b/d in 2014, has nearly doubled over the same period. Within the OPEC community, Middle East oil demand is growing faster than any other region with a 4% increase projected for 2015 7. These less-publicised statistics, which show that OPEC members now consume more than one quarter of their combined output domestically, reinforce the need for measures to diversify dependence away from a single commodity, the price for which may have passed its historic peak. 4 OPEC Reference Basket : opec.org 5 End-2013 data from CIA 6 UN 2000; Population Reference Bureau - 2014 7 OPEC Monthly Oil Market Report, November 2014
Page 4 THE DEMOGRAPHIC DIMENSION Given the aligned economic interests between OPEC and non-oecd exporters such as and other former Soviet states, it is useful to aggregate all non-oecd exporters when analysing the potential policy consequences of lower prices and this enlarged group is referred to below as Greater-OPEC. Figure 3 compares Greater OPEC s demographic footprint with oil exports and shows that with a combined population of 680 million, or nearly 10% of the global total, there is a significant mis-match between demographics and resources. At one extreme, the six GCC countries account for more than 40% of global oil exports yet only 7.6% of aggregate population, while Nigeria and Iran account for only 8.9% of exports yet represent 37.5% of the aggregate population, statistics which underline the sharply divergent socio-economic pressures being felt at a time of falling prices. Oil Exports 2013 (39.5 MMb/d) Population (680 Million) 100% 90% Others*** Other FSU** Others*** Other FSU** 100% 90% 80% 70% 60% 50% 40% Libya Angola Venezuela Iraq Algeria Iran Nigeria Libya Angola Venezuela Iraq Algeria Iran 80% 70% 60% 50% 40% 30% Other GCC ** 30% 20% Nigeria 20% 10% 0% Saudi Arabia Sources: OPEC World Oil Outlook, 2014 BP Statistical Review of World Energy, June 2104 Population Reference Bureau * Comprising Kuwait, Qatar, UAE, Bahrain & Oman **Comprising Kazakhstan, Azerbaijan, Turkmenistan ***Comprising Colombia, Eq. Guinea, Ecuador, Brunei Figure 3. Greater OPEC: Export Volumes vs. Population. Other GCC ** Saudi Arabia 10% 0% This asymmetry within Greater OPEC between population and oil resources is magnified considerably within the pivotal Mid-East region, comprising Iran, Iraq and the five GCC oil exporters 8. These seven countries hold an estimated 803 billion barrels of oil reserves or 70% of the Greater OPEC total 9 yet account for only 24% of the population. More importantly, the divergence between these seven neighbouring countries is stark, with GCC countries enjoying export volumes equal to more than four times those of Iran and Iraq, as shown in Table 2. 8 Saudi Arabia, UAE, Kuwait, Qatar & Oman 9 BP Statistical Review of World Energy, June 2104
Page 5 Table 2. Mid-East: Selected Populations vs. Oil Resources. Total Population (millions) Oil Resources 2013 Exports Reserves (MM bbls) (% share) (Bln.bbls) (% share) GCC 52 6,005 81 496 62 Iran 77 568 8 157 19 Iraq 35 854 11 150 19 Totals 164 7,427 803 Sources: Estimated population data extrapolated from PBS.org: "Red Lines and Deadlines", 2004 & Population Reference Bureau, 2014; BP Statistical Review of World Energy, June 2014 THE GEOPOLITICAL DIMENSION Historically, Iranian geopolitical ambitions have been constrained within OPEC by the absence of any strong alliances. While Iranian demands for asymmetric production cuts by Saudi Arabia and the Gulf states have resonated with Nigeria, Algeria and Venezuela, Iran s hard-line theocratic ideology has tended to isolate it from its fellow OPEC members in a wider geopolitical context. Despite open friction on oil policy, the risk of full-scale military conflict between the Mid-East OPEC members appears unlikely in the near term. While Iran was able to demonstrate robust defensive capacity during the 1980 s war with Iraq and has the region s largest standing army 10, absent any nuclear offensive capability, it lacks the resources to project and sustain a conventional regional conflict against the well-armed forces of the GCC states. However, there are three potential scenarios in which this isolation could change and from which an emboldened Iran could emerge, namely: The Iranian acquisition of a nuclear military capability. The creation of a Greater OPEC to include and former Soviet states in the wake of the recent oil price collapse. A continuation of an Obama-inspired disengagement from a US interventionist posture in the Gulf region in the aftermath of the Iraqi and Afghan campaigns. A NUCLEAR IRAN Arguably, the geopolitical consequences of Iran s acquisition of a nuclear capability may be relatively simple to analyse insofar as the likely result would be a regional Cold War, greater isolation for Iran and a retreat from any efforts to engage the Iranian leadership by both regional and global powers. Sunni-dominated Muslim countries such as Egypt, Turkey and Pakistan would be more likely to support the GCC countries from both a fraternal and economic standpoint while the larger oil importing nations of the OECD, China and India would be keen to limit any extra-territorial Iranian actions designed to interfere with Gulf oil supplies and/ or raise prices. In short, the introduction of nuclear weapons into the region s military balance would strengthen the strategic case for a nuclear guarantee for the GCC states from the international community, notably the US. 10 Business Insider: Most powerful Militaries in the Middle East, 27.10.14
Page 6 A GREATER OPEC Having frequently attended OPEC meetings as an observer, the prospect of (and others) joining an enlarged OPEC is not a new concept but until recently, eschewed the idea in favour of prioritising the development of economic ties within the G8 group of advanced nations. However, the events of early-2014 in Ukraine and Crimea, which led to economic sanctions, have abruptly isolated from its G8 colleagues and caused it to seek new economic relationships in East Asia and elsewhere. With the Ukrainian stand-off promising to become more protracted and, facing a painful economic adjustment, n attitudes toward OPEC membership could change. While the GCC states are not short of allies outside of OPEC, the addition of to OPEC deliberations over oil pricing policy would serve to further isolate the GCC within the exporting group. In this scenario, a potential alliance between and Iran, with vocal support from Venezuela, would alter the dynamics of OPEC and add significant potency to its hawkish constituency in terms of both oil production volumes and military capabilities. While would be reluctant to engage in overt military hostilities towards any Arab state, the potential for Russo-Iranian covert initiatives may be higher as exemplified by recent Iranian sponsorship of proxy wars in Lebanon, Syria and Iraq. The catastrophic lessons from the Syrian civil war highlight the inherent risks facing authoritarian, minority Governments that lack democratic legitimacy. US DISENGAGEMENT The post-mortem on US intervention in Iraq and Afghanistan after more than a decade of involvement in each country carries more negatives than positives. Both countries remain mired in civil war and lack durable governance institutions and the American appetite to continue with a physical presence in either country until plural, legitimate government is achieved has clearly diminished. In parallel with a US military withdrawal, the Obama Administration pointedly distanced itself from Arab pleas to aid the Mubarak Government in the face of the 2011 street protests and has somewhat modified its position in the Palestinian/ Israeli dispute towards a more neutral stance. Arguably, such policy shifts are logical for a country whose oil shipments through the Straits of Hormuz are less than half those of China and account for less than 10% of total consumption 11. However, they also evidence a subtle change in strategic thinking as the US comes to terms with an increasingly multi-polar world in which its ability and appetite to intervene with boots on the ground is visibly waning. Logic suggests that the high dependence of the EU, India and the East Asian powers would impel these countries to provide security guarantees to the GCC states in the event of hostilities but the reality is that even a partial US disengagement would presently create a regional power vacuum in which Iranian influence would be elevated. In this scenario, while a combination of support for the GCC states from Egypt, Turkey and others may be sufficient to deter or limit Iranian adventures, the addition of in support of Iran creates an entirely different balance of power. CONCLUSION OPEC s ability to weather the short-lived 2008/09 oil price collapse suggests that it may be premature to predict the organisation s demise but with both demand and supply indicators pointing to the most competitive oil market since the 1980 s, OPEC s status as the dominant actor will be tested severely in 2015 and beyond. It is in these circumstances that consideration needs to be given to potential outcomes. While greater supply competition and low prices augur well for the global economy, the potential emergence of an enlarged alliance of hawkish oil exporters led by an ostracised and including Iran and Venezuela, could be a prelude to heightened Mid-East tension and greater geopolitical isolation for the GCC states. Any such outcome would polarise the entire region politically and test the strength of Saudi Arabia s security relationships both within the Islamic fraternity and beyond. 11 EIA for 3-month period to October, 2014
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