OPEC+ Cuts Fail to Stop Oil Price Decrease

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OPEC+ Can’t Stop Oil Prices From Falling

The group of oil-producing countries, known as OPEC+, has agreed to voluntary cuts of over 2 million barrels per day through the first three months of next year in response to a slump in crude oil prices and predictions of a renewed surplus in the coming year. As well, Brazil will join the alliance in January, bringing one of the world's fastest-growing oil producers into the fold. However, despite the efforts of OPEC+ and individual member countries to cut back on production since October 2022, oil prices have not seen lasting changes.

Brazil has been producing record amounts of oil this year and its inclusion will increase the share of global production controlled by OPEC+ to 62%. This is similar to the share held by the organization when Russia joined in the mid-2010s.

The outlook for oil has weakened in recent months due to supply outstripping demand and a darkening economic backdrop. Forecasters, including the International Energy Agency, anticipate a sharp slowdown in demand growth next year, which could further impact oil prices. The expanded cuts are expected to keep crude prices in the range of $80 to $85 a barrel for the first half of next year. Currently, the average price for a gallon of gas is around $3.25, down about 7% from a month ago.

OPEC+ has been reducing oil production for nearly two years, a strategy that, contrary to expectations, indicates a bearish trend for oil prices rather than a bullish one. This continued reduction in supply, coupled with a demand that fails to match these elevated prices, signals a potential further collapse in demand. By intervening and restricting the free market's role in price determination, OPEC+ risks eroding future demand, as consumers may find themselves increasingly unable to afford the rising costs.

Climate Summit

The COP28 climate summit in Dubai is taking place against the backdrop of the urgent need to address climate change. Governments from over 190 countries will be attending the conference, with Western officials calling for sharp reductions in fossil fuel burning to fulfill the Paris Agreement. However, developing countries such as China, India, and Saudi Arabia argue that they still need coal, oil, and natural gas for economic growth and energy security.

The Environmental Protection Agency (EPA) in the United States has also announced methane regulations that will cover thousands of domestic oil and gas facilities to ensure that methane is not escaping into the atmosphere. The United States, has announced a $1 billion grant fund to help lower-income nations reduce methane emissions from oil and gas operations. Some of these funds will be channeled through the World Bank.

A report released at the summit warns that without major cuts to fossil fuel use, the Earth will inevitably overshoot the climate goals set out in the Paris Agreement. The report emphasizes the need for immediate and transformative action to rapidly decarbonize the economy, energy, and land-use systems. It suggests cutting emissions by 43% by 2030 relative to 2019 levels to stay on track with the goal of limiting global warming to 1.5 degrees Celsius.

There was pledges by fifty of the world's top fossil fuel companies, including ExxonMobil, TotalEnergies, BP, Shell, Saudi Aramco, and Abu Dhabi National Oil Company, committed to eliminating emissions from their own operations by the middle of the century. While these commitments are significant, they only address about 15% of the total greenhouse gas emissions produced by the energy sector. The burning of fossil fuels, which accounts for about three-quarters of all climate change-inducing greenhouse gas emissions, was not directly addressed in the pledges. Oil and gas companies investments in low-carbon alternatives have been relatively small, accounting for only 1% of global clean-energy funding.

Financing The Green Movement

The need for financing the energy transition is immense, with estimates suggesting that $5 trillion of investment will be required annually until 2050. This is equivalent to the entire annual revenue of the oil and gas industry. The International Monetary Fund estimates that developing countries will need $2 trillion per year starting in 2030. The funding provided by wealthy nations to support clean energy projects in these countries has mostly come in the form of loans rather than grants. This has raised concerns about increasing debt burdens on developing countries. Indonesian President Joko Widodo has called for climate funding to be more constructive and less burdensome on developing countries.

There are concerns about the construction of coal-burning power plants being built in developing countries. The US and other Western countries are calling for a global halt to such projects, while developing countries argue that they still rely on coal for their energy needs. In South Africa, the state-controlled power company has delayed its plans to retire coal-fired power plants. This delay is a setback for the country's commitment to reducing carbon emissions. The reliance on coal in South Africa is not only for electricity generation but also for job creation and economic development. The mining industry, which is closely tied to coal, supports local economies and industries. Politicians in South Africa have deep ties to mining companies and unions, making it difficult to abandon coal as a reliable fuel source.

Fossil Fuel Phase Out

The head of the International Energy Agency (IEA), emphasizes the need for a decline in fossil fuels but also forecasts an increase in demand for most hydrocarbons. This highlights the dissonance between rhetoric and reality. While there is a push for a rapid phase-out of fossil fuels, it is unrealistic to expect an immediate end to their use. Oil and gas will continue to play a significant role in the global energy mix for at least the next two decades. Diplomatic gestures alone cannot wish away the reality of rising oil demand, particularly in emerging markets and countries seeking economic growth.

Petrostates are at risk of losing significant revenue as the world moves towards renewables. A study by financial think-tank Carbon Tracker found that economies reliant on oil and gas, such as Saudi Arabia and the United Arab Emirates, could see their expected income from fossil fuels more than halve by 2040 under current climate pledges. This poses a risk of instability in these nations and could have global implications.

It's noteworthy that these summits and pledges operate under the assumption that fossil fuel consumption can be significantly reduced. However, this perspective may overlook a crucial aspect of energy transition. Although the advent of newer, more efficient energy sources will increase their share in overall energy consumption, it doesn't necessarily equate to a decrease in the absolute demand for traditional fossil fuels. Instead, as these renewable sources become more prevalent, the demand for conventional energy sources is likely to remain relatively stable, rather than diminishing as one might expect.

Total World Energy Consumption By Source

Percent of World Energy Consumption By Source

ESG Market Impact

In the US, the SEC is expected to adopt climate disclosure rules. If finalized as proposed in 2022, these rules will impose a requirement to reveal unprecedented detail about companies' climate risks. Many global businesses already voluntarily report some climate information. Last year, 400 companies from the S&P 500 disclosed data on their climate response.

In 2021 managers like BlackRock, Vanguard, and State Street were investing based on an ESG philosophy. These manager have since become more conservative in their support for ESG proposals. In the 2023 proxy season, managers backed only 7% of environmental and social proposals at companies' annual meetings, a significant decrease from the 47% support seen two years earlier. There has been a clear shift in how people are investing, moving away from ESG.

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