Iran must gradually shift from exporting crude oil to selling petroleum products and petrochemicals, as it invests in expanding its oil and gas production capacities to handle the future market challenges, said an expert.
Speaking in an exclusive interview with Iran Daily on the occasion of OPEC’s 60th anniversary (September 14), Mehdi Asali, a former director for OPEC affairs at the Iranian Oil Ministry, added that increasing production of high-quality petroleum products and petrochemicals is another favorable measure which is quite possible to implement.
He also commented on OPEC’s market influence and role, future challenges and formation of OPEC-plus.
Excerpts of the interview follow:
IRAN DAILY: In the 1970s, OPEC was the oil market’s greatest power. At present, however, the organization does not have the same status. What has reduced OPEC’s influence in the world market?
MEHDI ASALI: A glance at the reasons contributing to OPEC’s significant market influence in the 1970s will help shed light on the causes of the organization’s diminished clout in the following decades. Three main variables impact the extent of OPEC’s market influence:
Its share of the oil market (the bigger it is, the greater becomes the organization’s influence.)
Price elasticity of demand for its oil (the lower the price elasticity, the greater becomes the organizations market influence.)
Price elasticity of non-OPEC supply (the extent of the elasticity of supply by non-OPEC producers)
In the 1970s, these variables tilted in OPEC’s favor, helping the organization have a market share of over 50 percent. The elasticity of demand by the customers of the organization’s oil was also not very high compared to the increase in OPEC’s crude price. This was because importing refineries had adjusted their technologies according to the quality of OPEC members’ oil and were unable to find other types of crude to replace that. In addition, at that time, production technologies failed to be advanced enough to allow non-OPEC producers to immediately increase output upon detecting changes in the crude price. Thus, it was, in practice, OPEC that set the prices. Since then, these variables have begun to gradually undergo changes that have not been in OPEC’s favor. Some of the changes have been inevitable, such as the increased energy consumption efficiency and reduced energy intensity in the world. The other cause of OPEC’s reduced market influence has been the increase in the number of non-OPEC producers and their production.
Nevertheless, OPEC could have reduced the number or pace of some of the changes through adopting better strategies.
Will OPEC’s waning market influence lead to the disbandment of the organization?
No. OPEC still holds the biggest share in the global energy market and, most probably, oil will continue to have a significant share of the global energy mix in coming decades. In addition, the cost of oil production by OPEC members is still lower than that which is spent by the world’s other major producers. Thus, OPEC is still a major player in the global oil market and can increase its influence if it revises its strategies. No doubt, at present, OPEC is faced with a volatile situation. Technological advances in global supply and demand sectors have impacted the organization’s traditional market influence. This situation, however, will not necessarily lead to OPEC’s disbandment.
Why has the 60-year-old OPEC turned to cooperation with non-OPEC countries and formed OPEC-plus? Why has the organization voluntarily reduced its production and market share?
Market share plays a significant role in determining the extent of a major oil producer’s market influence. For a greater oil market share, OPEC has two options: It can either expand its production capacity through hefty investments to sideline other producers, which may lead to a fall in prices and impose losses on the organization or, through cooperation with non-OPEC producers, create a balance in the market and prevent a plunge in oil prices, which will be a win-win situation.
Therefore, it is quite natural that OPEC would make efforts, through collaborations with a number of non-OPEC members, to expand its impact on the market. Major non-OPEC producers, such as Russia and other participant countries in the Declaration of Cooperation, have an even higher motivation for cooperation than OPEC members. This is because the cost of oil production by OPEC is still much lower than that by non-OPEC producers, meaning that in any long-term market competition, non-OPEC countries will be the ones to sustain losses.
The recent considerable drop in oil prices was not solely due to the coronavirus spread. A number of factors have led to the weakening of the market. Over the past few months, the oil market has suffered major shocks simultaneously from the supply and demand sides of the market, which has been a rare phenomenon in its history. On the supply side, the unprecedented accumulation of oil and petroleum products in major importing countries’ depots and the considerable growth in US crude production came as shock to the market. In 2019, total crude output by the US, Brazil, Norway, Canada and Russia surpassed that of OPEC. On the other hand, the outbreak of the COVID-19 pandemic in early 2020 and the consequent closure and suspension of businesses and economic activities, particularly international and intercity flights, caused the global demand for crude and petroleum products to witness an unprecedented drop, as a result of which the oil price plunged to its lowest level since 1991.
These structural changes, along with the unexpected shocks, such as the outbreak of the coronavirus pandemic, have created major challenges for OPEC at a time when some of its main members, such as Iran and Venezuela, are struggling with cruel sanctions, and a number of them, like Iraq and Libya, are grappling with political civil conflicts and unrest. Under such circumstances, OPEC loses some of its market share. In addition, such conditions have led to an increase in the price elasticity of demand for OPEC oil and the price elasticity of non-OPEC supply. All these three changes reduce OPEC’s market influence.
How important is OPEC’s market coordination role? Is the oil market capable of surviving without OPEC?
OPEC is the sole major player in the oil market which is capable of providing such coordination. In fact, the excess capacity maintained by OPEC is the main shield against oil market fluctuations helping the organization to weather them. This excess capacity is by far more important than US shale oil capacity in fending off shocks and preserving market stability, because of the lower costs involved in OPEC members’ oil production. Most producers of US shale oil are unable to bring production costs down to less than $40 per barrel. This comes as the average oil production cost by OPEC members stands at $20 per barrel. Many experts maintain that without OPEC, the oil market will be exposed to many fluctuations and become unstable. Since wild oil price fluctuations have many negative consequences, OPEC’s presence and decisions, aimed at ensuring market stability, create a high value for the global economy.
What will be OPEC’s future challenges?
Compared to the previous decades, OPEC is currently faced with a changing world and inevitably has to rethink its strategies accordingly. Among the main challenges facing the organization is climate change resulting from fossil fuel production and consumption. It appears as if the international community will, in the coming years, inevitably move toward lowering production and consumption of oil, coal, and even natural gas as a high-priority policy.
To overcome such challenges, OPEC can:
Make investments to expand its members’ oil production capacities and develop their technologies to capture, store and use the carbon emitted in the processes of producing and consuming oil and gas
Increase its member states’ energy efficiency and diversify their economies to reduce their reliance on oil
Promote the use of crude oil and natural gas as raw materials for production of base petroleum and gas products, in downstream industries, particularly the petrochemical sector
What measures should be implemented by Iran given what you said about the future challenges and the required strategies to address them?
What was said about OPEC and ways to increase its market influence holds true about Iran and any other member country. Iran must gradually shift from exporting crude oil to selling petroleum products and petrochemicals, as it makes investments to expand its oil and gas production capacities. Increasing production of high-quality petroleum products and petrochemicals is also a favorable measure, which is quite possible to implement. As a parallel measure, the country must also invest in the development of technologies to boost energy efficiency, reduce its energy consumption and increase its carbon capture and storage capacities. This will enable the country to continue using its huge oil and gas reserves in the coming decades.