OPEC's strategy to lift prices is wrong: Experts

OPEC's strategy to lift prices is wrong: Experts
Higher oil prices may have encouraged a ramp up in production, particularly in the US, which created such a supply glut that prices came crashing down in 2014.
Published: 28 February 2017 - 7:41 a.m.
By: Yasmin Helal

OPEC and non-cartel members may be employing a wrongheaded approach to shrinking a global supply glut, according to Dieter Helm, economist and Professor of Energy Policy at the University of Oxford in the UK.

Speaking at the International Petroleum Week in London earlier this week, Helm struck a decidedly dour outlook on the oil industry, arguing that history suggests prices are only heading one way—down. That means, if you are a member of the Organisation of the Petroleum Exporting Counties or another major oil producer, you should boost production, rather than scale it back.

“For the NOCs (National Oil Companies) in the Middle East and elsewhere, increasing production is quite a good idea, because you’re going to need the money and you might as well get your stuff out of the ground now rather than later. So, the opposite of what’s currently happening,” Helm said.

After months of speculation, negotiations and anticipation, OPEC and 11 non-OPEC producers, including Russia, came together in December and hammered out a historic deal to curtail oil production. The idea was to make a dent in the world’s oversupply, which has hammered prices that peaked at more than $100 a barrel back in 2014.

The deal has largely been credited with lifting oil prices about 20% in recent months and has been hailed as a success by the participating nations.

But Helm says, regardless of any OPEC action, prices are going to fall, which means oil today is worth more than oil tomorrow. From that perspective, there is no incentive to leave oil in the ground longer than necessary.

Delegates at the London conference were optimistic that prices could remain around $55 or higher, but historic data offer a different outlook, according to Helm.

“$50 oil is a very high price for oil and over the next decade or so the price of oil will probably carry on gradually falling, as it did for 100 years, between 1870-1970,” he said.

Helm says there isn’t a direct correlation between demand for oil and a rise in prices, based on historical data. “It didn’t [between 1870 and 1970]. And it probably won’t in the future,” he said.

As the chart from BP shows, oil prices—adjusted for inflation—gradually moved lower for a century, before political unrest in the Middle East in the 1970s coincided with a sharp rally. Then prices reverted closer to their historic average until oil prices jumped above $100 amid the Arab Spring in 2011.

Higher oil prices may have encouraged a ramp up in production, particularly in the US, which created such a supply glut that prices came crashing down in 2014.

Crude oil bottomed out below $27 a barrel in February 11, 2016 and has since soared to trade around $54, partly due to OPEC’s efforts.

“So, OPEC may have cobbled together something for six months, in my view relatively ineffectively, but this is a temporary dam and it is very, very likely that it will fail,” Helm said.

The Oxford professor and author of several oil-related books also offered other arguments as to why its game-over for rising oil prices. The sharper focus on climate change will decrease demand for fossil fuels, he said, while digitisation means less need for transporting people and goods around.

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