In the 21st century divorces have become a common occurrence and no matter how amicable, they are almost always messy as the paramount question lingers on: WHAT NEXT?
On December 3, 2018, the Middle Eastern country of Qatar, announced that it would be pulling out of the Organisation of Petroleum Exporting Countries (OPEC) by January 2019, making it the first Gulf Country to pull out of the cartel. This is coming at a time where the United States is seeking to pass Anti-OPEC Bills, and when the cartel is trying to rein in oil producing countries that are non-members. Thus, we wonder, is the cartel gradually losing its relevance and headed towards a time bound death?
It should be recalled that OPEC was established in 1960 to regulate oil price in the international market. The stated mission of the organization is to “coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” Years after, it is no longer hitting the high strides it once used to.
The exit of Qatar from OPEC just days before a December 6 OPEC meeting comes as a big blow to the oil cartel, as it has been a relevant player in the operation of the cartel. Qatari authorities say this move is predicated on Qatar’s desire to focus on gas production. This however has been the subject of doubt and political debates especially noting that Qatar’s Energy Minister, Saad al-Kaabi, in announcing the move made a reference to how OPEC has become “an organization managed by a country.” Whilst he made no direct reference to Saudi Arabia, a tag team of common sense, logic and political awareness would lead us to the conclusion that Qatar’s recent move cannot be totally unrelated to poor diplomatic relations between both countries. To put this in context, the Saudi government has since June 2017 collaborated with three other gulf states to impose economic blockades on Qatar based on allegations that Qatar has been involved in the funding of terrorist activities.
Since the announcement was made there have been unending contemplations as to whether this development would have any major impact on the operations of OPEC, and of course there have been differing stances. Andy Critchlow, head of EMEA energy content at S&P Global Platts, in an interview with CNBC’s Squawk Box Europe stated that: “In the 20 years that I’ve been covering OPEC, I can’t think of anything that is bigger than this (and) that is a more systemic risk to the future of OPEC.” Whereas Ayham Kamel, head of Eurasia Group’s Middle East and North Africa research team, told CNBC on Monday that “I think OPEC is still alive.”
Whilst it is true that Qatar was merely a marginal contributor to OPEC’s total output, producing only a meagre 600,000 barrels per day, the impact that its departure may have is more symbolic than economic. What Qatar’s exit illustrates is a dissatisfaction of OPEC members that have small buffers with the unitary control of the organisation by Saudi Arabia and its allies.
The exit also offers a big blow to OPEC which has been trying to reduce the influence of non-OPEC oil producing countries by attracting them into the fold, and while it has succeeded in reining in Equatorial Guinea in 2017 and Congo in 2018, the exit of Qatar sets it aback, even if a little. The fears of OPEC itself were made clear from its reaction to the exit, as its announcement of the receipt of Qatar’s notice of exit on its website ended with a statement of self-validation as it tried to downplay the exit by re-announcing its latest membership gains like an ex-husband showing off his new girlfriends.
Prior to the exit of Qatar, OPEC accounted for about 40% of global oil production, whilst Qatar accounted for under 2% of this figure, thus the numerical impact is marginal, if anything. However, Qatar’s exit now leaves OPEC weaker than it was, with a membership of fourteen countries, which include seven African countries, five Middle Eastern countries and two South American countries most of whom have very small buffers compared to the bigger players like Saudi Arabia. This results in a scenario where there exists a possibility that these countries would at a point begin to feel like the Organisation, which is gradually becoming a one-man entity, is failing to protect and promote their interests, the same way Qatar felt.
The future of OPEC is also threatened by the growth of business for the non-OPEC oil producing countries that are doing great outside of the OPEC mechanism and account for almost 60% of the global oil production. This consideration has prompted OPEC to collaborate even with these non-members in the quest to regulate world oil prices. An example is found in the fact that these non-members are allowed to participate in OPEC meetings and deliberations as observers. Qatar’s defection could also raise questions about OPEC’s ability to enforce future production cuts. This questions the relevance of the cartel as it now has an even looser grip over world oil production.
SHOULD NIGERIA LEAVE OPEC?
Nigeria, having been a member of OPEC since 1971, is one of the member states that have a relatively small buffer when compared to states like Saudi Arabia which produces almost 10 million barrels per day. For years now, there has been a prolonged debate as to whether Nigeria should remain in OPEC or withdraw its membership.
Whether a country joins or withdraws from an organisation is usually predicated upon whether the interests of the said country align with the organisation and whether the latter can continue to assist the former in the propagation of its interests. It is on this premise that this writer answers this question in the positive.
OPEC’s dip in relevance is largely a corollary of the independent actions of some of its powerful members who appear to have placed their national interests far above the joint interest. For instance, Saudi Arabia’s actions with respect to Iran have seen to a dip in oil prices. To this end, many of the less powerful members like Nigeria who largely rely on their oil income have been short-changed. Nigeria must upon recognition of this fact, withdraw from OPEC if it wishes to guarantee its interests. Nigeria has better chances of securing for herself greater oil revenue through sole and independent exploitation of its oil resources, since upon withdrawal she is no longer bound by the quota allotment and production cuts imposed by the body.
Furthermore, membership of OPEC many a times also seems to have an inhibiting effect. Owing to some of the policies and directives of OPEC, Nigeria has been unable to effectively implement some of its economic policies to have the desired effect. An example of this is the devaluation policy which Nigeria’s economists often resort to as a potion to remedy Nigeria’s economic maladies. However, the logic behind devaluation is to make imports more expensive and thus less attractive than exports, hence promoting exports. But since Nigeria can neither expand its production nor increase the prices of its oil exports, this is hardly beneficial.
In the same vein, the policies and decisions of the OPEC heavyweights often take a toll on the economic development of Nigeria. In 2016 for instance, OPEC employed a kamikaze strategy to kill off competitions from shale producers that saw oil prices dip to around $40 per barrel. Countries like Nigeria with fewer buffers and who rely heavily on crude oil income bore the brunt. Also, ahead of 2018, OPEC limited Nigeria’s oil production to 1.8mb/d. This is particularly disheartening knowing that Nigeria has the resources and capacity to produce more, for example, in April 2018 Nigeria produced 1.97mb/d. It should also be noted that countries like Angola and even Saudi Arabia which have lesser populations than Nigeria have greater quota allotments.
Hence as the influence of the cartel is waning and by the day it becomes more difficult to see the benefits of membership for countries with smaller buffers, Nigeria must endeavor to shape its own future and chart its own course in this river of oil, rather than be held down by a scarcely profitable alliance.
It may indeed be too soon for anyone to declare the purported exit of Qatar as spelling doom for the oil cartel, however what is clear is that this recent development only places OPEC in a worse position than it stood prior to this development. Whether OPEC can remain unfazed and unaffected by this decision whilst also trying to ward off competition from non-oil sources of energy, establish a working relationship with the non-OPEC oil producing countries, attract more members and keep its old members, is a difficult question that is best left for time to answer. However, by all indications, if this embattled household fails to gather its wits this just might be the beginning of the end for our dear OPEC.