OPEC: The new way forward

The world is evolving at an alarming speed, with spontaneous changes in business paradigm. It’s time for OPEC to reinvent itself or it might lead to another trip to Baghdad for a more international and comprehensive energy body.

Either OPEC has fallen comatose or this permanent intergovernmental organization, which was formed in Baghdad on Sept. 10-14, 1960, and now comprised of 13 oil exporting nations, has become hypoglycemic. Hypoglycemia could be the possible condition to describe the diagnosis of the visible ailment which OPEC now faces putting all the symptoms in perspective: shakiness, staggering, sweatiness, headache, hunger, drowsiness, irritability, blurred vision, dizziness, slurred speech, weakness, numbness or tingling.

The prevailing global recession and financial tsunami eroding the economies of the world has pushed the demand of oil down, causing the price of oil to slide. This situation has caused and unprecedented turmoil in the once strong organization whose iota or jot of word in terms of global oil business would easily redirect the market to its favor. Now market indications show that the economies of most member states of the Organization of Petroleum Exporting Countries are shaking, staggering, sweating, and hungry leaving the organization with more headaches to worry about. The staggering market and the sliding price of crude will significantly affect the economies of most member nations of OPEC in the long run such as Nigeria, Angola, Equatorial Guinea, Venezuela, to mention but a few which derives about 90% of their national revenue from oil exportation.

OPEC has for some time without luck continued to seek for a new way to bring out its members from the doldrums caused by the plummeting oil price and ensure its objective which is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

OPEC has produced enough oil as would be expected but the market demand has dropped due to reduced consumption, forcing the price of crude to tumble from a colossal height of $147 at the end of July 2008, to its current low price (between $36 to $40). As the price of crude continued to fall like a shattered pack of cards, OPEC on December 17 at the conference of OPEC’s oil ministers in Oran, Algeria announced that it will cut production to 2.2 million barrels per day, hoping that the logic behind the economics of supply would help hike up the price of oil to at least $75 per barrel. Unfortunately the magic rod struck the wrong rock and the luck of the oil man failed. Oil price nosedived to around $40.

Currently, OPEC seems to be losing her clout and her members have been exposed to a great dilemma making many writers such as Stanley Reed, of BusinessWeek, and phalanx of analysts, observers and pundits to ask: Does OPEC Still Matter? Market analysts have started to question the relevancy of OPEC and the possible emergence of a more global organization of oil and gas producing nations which may have Russia as one of the key stirring members.

Reality has began to dawn on OPEC that time is changing fast and there’s an urgent need to seek for another way out .The much articulated low consumption of crude oil may not be solely attributed to a declining world economy. Another crucial factor is the new move towards alternative, sustainable, renewable clean energy; the pertinent need for energy security and independence chiefly championed by United States, the world’s greatest consumer of energy and other western countries. If Barrack Obama, as the 44th president of United States makes good his election promise to pursue a vigorous energy program that would promote alternative energy, clean fuel, hybrid technology and ensure energy independence for United States, for sure America’s huge purchase of crude oil from OPEC nations will tremendously be affected.

It’s been predicted that by 2010 the scope of the energy market will become broader and more competitive as a result of the burgeoning effect of the enormous campaign for neo–efficient renewable energy policies and emerging new technologies which is seriously expected to change the business landscape. Therefore, it has become imperative that energy sectors that would survive must have pragmatic policies fuelled with competitive strategies, driven by astute leadership and engineered through high quality human capital base. Reduction of overall production cost is necessary which must be achieved by innovative technologies, research and development, educational initiatives, finance availability and peaceful socio-political domain.

Most OPEC nations are politically volatile with several local disputes ensuing over the control or distribution of oil wealth which has for long remained the sole source of national revenue. Poverty and lack of visionary – cum transparent leadership has rendered these nations backward, thereby inflicting much dint in its human capital development.

In order to regain its stability as a foremost global energy cartel and also help to ensure growth for its member nations, OPEC must assist its members in reviewing their current energy policies which has not garnered much traction. To strategically cut cost, oil producing nations of OPEC affiliation must control capital flight. Most of the E&P and service jobs done in these countries are handled by foreign companies. It is evident that the foreign oil companies have the needed human, financial and technological resources to carry out the business. At the end of the day, huge sum of money paid out leaves the local producing nations to foreign countries. A drive to create a balance would help these nations to cut cost and retain most of the capital locally to stimulate their economy.

A serious investment into technology development and R&D is drastically needed if OPEC nations will survive the next decade. United States new government and European nations are poised to invest heavily into new technologies to meet up the challenges of their national energy demands by the year 2013. Unfortunately OPEC nations lack capital and meaningful technologies that would propel their business at the right velocity so that it will not to drift away from the next market terrain. This will be a very risky period for OPEC because as the market becomes more technologically based, nations that can innovate easily such as U.S, European nations, and the emerging markets of China, India and Brazil will have the upper hand leaving OPEC nations staggering. The importance of creating an educational outfit that would essentially work with member nations to biff up the quality of education and training their people receive is very essential. This will create a vital human capital which can conveniently innovate and utilize existing technologies to withstand the imminent surprises of the next decade in the energy market.

It is crystal clear that local operators in OPEC producing nations lack or do not have easy access to huge finance to enable them invest in E&P activities or carry out major contracts. Without adequate liquidity and capital these local operators cannot improve beyond their crude level, thereby still allowing FOCs to continue dominating the business. Once over 70% of the activities towards oil exploration, production and services are done by IOCs, economies of scale and law of comparative advantage in the market will no longer favor the producing nations. OPEC may think of creating its own financial institutions that will be strongly dedicated to the funding of projects and procurement contracts for local vendors in member nations. Unavailability of financial resources, adequate technologies and not having enough trained manpower affected the success of local content policies pursued by some producing nations.

While the market is still staggering and struggling to weather the storm; it is high time OPEC reviewed its priorities. The survival of OPEC in the next decade depends on the ability of the member nations to keep their heads above water, by producing enough quantities of oil at low cost; having a fair and stable price of petroleum products and ensuring equitable returns to those that invested in the business. This is no longer time for OPEC to play chase game with market forces and expecting a magic. The world is evolving at an alarming speed, with spontaneous changes in business paradigm. It’s time for OPEC to reinvent itself or it might lead to another trip to Baghdad for a more international and comprehensive energy body.