With the landmark deal on climate change unanimously agreed to by 195 countries in Paris in December 12 signifying what many consider the beginning of the end of the use of fossil fuels in many aspects of modern life, the outlook of the oil industry is anything but bright.
What the OPEC Says
Roughly one week before the Paris meeting of world governments the leaders of OPEC met in Vienna to draft and issue their monthly statement mostly in anticipation of the effects of the COP-21/CMP-11 UN Climate Change Conference.
OPEC predicts that demand for oil will grow in 2016 despite ongoing low prices of oil that has been attributed to overproduction in 2015. Members of OPEC have been steadily pushing for an oil cap in order to curb supply. The oil glut that has come to characterize 2015 has been aptly described to be the result of a variety of factors that led to oversupply. Unusually good weather coupled with improved efficiency in oil production technologies has increased the daily output of petroleum. Unfortunately, demand from emerging economies as well as developing nations has not been responsive enough to take in the increased supply.
With a global economic growth in 2015 pegged at 3.1 percent, OPEC sees a 0.3 percent increase by 2016 which will be marked by the expansion of global oil demand by as much as 1.3 million barrels per day.
World Oil Producers
Globally, the United States leads Russia in oil and natural gas production. However, among OPEC members, the Kingdom of Saudi Arabia still reigns as the world’s largest oil producer at 11.6 million barrels per day, followed by the United Arab Emirates at 3.4 mb/d, Iran at 3.3 mb/d, and rounding up the world’s top 10, Iraq also at 3.3 mb/d. Other OPEC member countries in the top 20 include Kuwait, Venezuela, Nigeria, Qatar, Angola, and Algeria. The other countries in the top 10 include China, Canada, Brazil, and Mexico aside from the US and Russia. The world’s top 10 oil producers supply more than 60 percent of the global oil market.
Iran and the World Market
When oil sanctions were eased against Iran in the beginning of 2015, Iran began increasing its oil production with a modest growth estimate of 500 thousand to a million barrels per day in the first 6 months of the year. By November, it is already producing 2.8 million barrels per day. Iran has the lowest production costs as well as break-even costs which makes it very ideal for foreign investment. Iran’s crude oil reserves account for 10 percent of the world’s total crude oil reserves. With the easing of the oil sanctions against Iran coupled with the less-than-hostile relationship with Washington and the rest of the world, Iran’s entry into the global market cannot come at any other more appropriate time. With oil prices reaching all-time lows coupled with the COP-21 results and an overabundance of oil, the question is what happens now.
Impact on the Global Economy
Conventional wisdom will say that lower oil prices will lead to a reduction in the price of commodities as almost everything has a production component that is dependent on fossil fuel. However, some global equity experts show that lower crude prices posted a negative effect of 0.2 percent on the global economy. This has been largely attributed to large-scale cuts in capital expenditures, unemployment in oil companies that have closed down, shrinking hourly wages for oil and gas workers, and cuts to investor payouts.
Whether or not the COP-21 will produce highly-palpable results in the coming years, it is necessary for oil producing countries to work hand in hand with governments, business groups, and social and environmental activists to come up with a much more comprehensive approach to today’s concerns on climate change and fossil fuels. There must be a balance between the need for energy and the need to safeguard the planet while maximizing economic activities.