OPEC. Short for the “Organization of the Petroleum Exporting Countries”, this cartel meets on a semi-regular basis to set production levels for its members. OPEC controls roughly 40% of global crude oil production, so its meetings can move prices and set trends. Interestingly, the organization’s most recent meeting ended in a stalemate on how best to bring production back online as global demand recovers from the pandemic. Specifically, the United Arab Emirates (UAE) gummed up negotiations by insisting on a higher production ceiling for itself given its recent surge in growth capital expenditures. This skirmish was more than meets the eye though. While some see it as simple greed, others see the UAE’s position as a shrewd attempt to bring forward oil revenues to help the country diversify its economy away from oil before it’s too late. After all, this comes on the heels of Saudi Arabia’s announcement earlier this year to generate 50% of domestic electricity from renewables by 2030. Could energy transition be the straw that finally breaks OPEC?
Source: Organization of the Petroleum Exporting Countries
We recognize Saudi Arabia has an abundance of solar energy, which if utilized would allow more oil to be exported and benefit the country’s cash flow stream. This was how the country pitched solar to the masses back in 2012, though we suspect more recent support for solar is as a hedge against energy transition. Perhaps the forward thinkers are preparing for a long-term decline in oil consumption and therefore see a need to plant the seeds for a new growth engine. However, what if the rest of the OPEC member countries follow suit and decide it’s in their best interest to also bring forward oil revenues. It’s not a leap to think OPEC could even implode in such a scenario, as any cartel requires voluntary compliance from its members. No compliance, no cartel.
An OPEC implosion is admittedly over-dramatic, but it’s our attempt to isolate what we believe truly underlies this OPEC skirmish. That is, how best to deal with the energy transition threat. The UAE and likely others that remain silent believe revenue maximization offers several advantages:
- It will keep independent oil companies (IOCs) on the sidelines, keeping OPEC firmly in control.
- It makes the decision easier for the price conscious to opt for fossil fuels over renewables.
- It generates a revenue surge for OPEC members to finance the evolution of their economies.
Unfortunately for OPEC though, renewable energy demand is increasingly inelastic, particularly over the long-term. The reality is political and societal forces are firmly behind energy transition, and capital is being allocated as such. We’ve highlighted this virtuous cycle before and believe technological progression within renewables is an unstoppable force. For example, cheap gasoline barely tempered electric vehicle (EV) adoption over the past few years. It’s telling that renewable energy proponents rarely talk about oil and natural gas as a threat, preferring to focus on issues currently limiting adoption like reliability, grid interconnectivity, and further decreasing its cost curve.
For OPEC, the alternative is a more muted response, which will drive oil prices up from already inflated levels, which opens the door for IOCs to retake market share though more importantly incentivizes an acceleration in renewable energy innovation. Over the long-term it appears OPEC is stuck between a rock and a hard place, whereas owners of renewable infrastructure are positioned to prosper.
“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one most adaptable to change” – Charles Darwin
Source: Bloomberg. *Please review disclosure information at the end of this post.
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