The Organization of Petroleum Exporting Countries turned 60 on September 14 - and despite its colorful past, COVID-19 is proving to be its greatest challenge in that time span.
The pandemic wiped out a third of global demand for oil during the darkest days of crisis - the second quarter - and potentially linger on for the next few years. In OPEC’s latest bulletin, the group downgraded demand by another 400,000 barrels a day, down to just over 90 million barrels and noted the risks for 2021 are skewed to the downside.
“What I can share with you at the moment is that the global economy continues to witness some anemic recovery,” OPEC Secretary-General Mohammed Barkindo said. “We had anticipated a stronger rebound in the second-half of 2020 after the historic trials of the second quarter.”
According to BP’s energy outlook 2020, fuel consumption is poised to contract for the first time in modern history and the pandemic could bring about what is called peak oil demand as early as last year. Crystal ball gazing in the oil market is always tricky, because one cannot count on maintaining certain levels of growth.
OPEC, for example, is earmarking a recovery in global GDP of 4.7 per cent next year after the historic drop in 2020.
A three-way likelihood
With the second wave of COVID-19 and perhaps more to follow, reliably predicting a recovery is challenging. For this reason, BP has laid out three scenarios between now and mid-century: ‘business as usual’, a ‘rapid transition’ and ‘net zero’ or what is required under the Paris Climate Accord.
Under the rapid scenario BP sees oil demand dropping all the way down to 55 million barrels a day, with renewables making up 60 per cent of primary energy supplies. OPEC’s Secretary-General told me that in their outlook through 2045, the market share for renewables will still only be 20 per cent.
“Oil and gas will continue to dominate the energy basket and the underground resources in terms of proven reserves is in the region of about 1.5 trillion barrels,” said Barkindo.
This of course begs the question if a large share of those proven reserves will be stranded as a result of the energy transition. If that is the case, the ‘last man standing’ scenario comes to the fore, with the lowest cost producers of the world – those on the Arabian Peninsula – commanding the greatest market share.
According to the International Energy Agency in Paris, investment into the oil sector will drop $1 trillion due to the pandemic and the split between and that fossil fuel and renewables is running nearly 50-50.
As OPEC marks this anniversary, one also needs to consider the role the organization has played over the past five years when the industry was faced with three major downturns. At the close of 2016, OPEC+ members signed the Declaration of Cooperation that brought together more than 20 oil producers to enhance market stability. It has been tested time again during this period of economic uncertainty and a boom in global production.
“I think it would have been chaotic, much more chaotic than what we witnessed on the 20th of April when crude oil prices collapsed and fell to sub-zero,” said the Secretary-General. “However, we have proven again, once again that the world needs this organization.”
That is even true for US President Donald Trump, who during his first two years in office often tried to intimidate OPEC with his scores of tweets during ministerial meetings telling participants not to overdo their production cuts. He was worried high prices would kill off demand and undermine US shale producers in states like Texas, New Mexico and North Dakota.
Once again, COVID-19 turned that equation upside down. With demand collapsing in the second quarter of this year, it was OPEC+ - with some nudging by Trump – that was called upon to shore up the market by cutting up nearly 10 million a day from global output. And the alliance will continue to remove production through the first quarter of 2022.
It is quite a transformation for a group of 13 producers that at different stages over the last six decades triggered the Arab oil embargo and witnessed conflict amongst its members on more than one occasion, a high of $147 a barrel in 2008, and a low of sub-zero this year.
“As an organization, we had survived 60 years of highs and lows. We had our own good and bad times. But what we have witnessed in the last five years, including the current one, was totally unprecedented,” Barkindo concluded.
- John Defterios is Emerging Markets Editor on CNN Business.