Germany’s lower house of parliament, the Bundesrat, voted in October to ban the sale of cars with internal combustion engines by 2030. It is a resolution with no binding implications, but it did garner cross-party support. It is certainly a powerful statement of intent.
Seen from the capitals of the major oil exporting countries, it should be viewed with alarm, not that it will necessarily be achieved, but as a reminder that in combination with the technologies to deliver them, environmental targets only ever seem to get more ambitious in scope and in timing.
For oil producers, the idea that some oil will be left in the ground forever is a strong motivation to produce now. Revenue maximization no longer lies in controlling supply to support prices over time because time is running out. There is no point husbanding resources for future generations that reject their use.
But, in the short-term, the opposite appears the case, and OPEC is again considering output controls. This is for two reasons: the financial pain caused by low prices for economies far too heavily reliant on oil; and because producers are near the limits of current output capacity. Iraq and Iran are close to full capacity, Russia is pumping at record post-Soviet levels and Saudi output remains elevated. They are willing to ‘freeze’ only because they cannot produce much more.
Yet, just as OPEC edges towards an agreement, both Iran and Iraq are seeking billions of dollars of investment capital, which should result in millions of barrels of new oil production from relatively low-cost, conventional resources. Both already contest the limitations that an OPEC agreement would place upon their future development.
One of the most lasting legacies of US shale oil will thus be the rejuvenation of conventional Middle Eastern oil production, and the world’s dependence upon it. This is because US shale forced Saudi Arabia into open market competition, because climate change concerns have speeded up the peak oil demand clock, and because protecting resources with closed markets hasn’t delivered the desired growth.
This is a huge sea-change. Lack of access to resources was a permanent refrain of the oil industry in the early 2000s, one that was made all the more intense by the rise of Asian National Oil Companies as they started to compete for scarce assets with the western oil majors. This resulted in rampant asset value inflation and a huge shift in the balance of power between resource owner (the state) and would-be developers.
That pendulum has now swung back with a vengeance.
Iran and Iraq together hold 17.7% of the world’s proved oil reserves and at the lower end of the cost spectrum. In an open world market, the Middle East would produce the majority of the world’s oil. The region holds 47.3% of total proved reserves, predominantly in large, onshore, conventional oil deposits. Of the remainder, almost a quarter comprises expensive oil sands and heavy oil, which take decades and billions of dollars to scale up.
Despite the number of conflicts across the region, the Middle East is becoming more open to investment than at any time since the first oil industry nationalizations of the 1950s and 1960s. Moreover, the assault on Mosul in Iraq suggests that the high watermark of Islamic militancy may, for now, have passed.
Whatever OPEC can agree at its next meeting on November 30 in Vienna, it is likely to have an impact only in the short term. They should take note of a vote to ban oil-fired car engines in a country that has been and remains at the forefront of the development of the internal combustion engine. The climate change clock suggests a free for all, in which OPEC can only maximize revenue by maximizing volume and that means displacing non-OPEC supply through competition.
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