The Carte Blanche - BlogUncategorized

Is OPEC the new Mike Tyson?

Tyson’s Tokyo trauma of February 11th 1990, when the seemingly untouchable behemoth was brought back down to Earth with a bang, is playing out once more, but in the oil industry.

The Organisation of Petroleum Exporting Countries (OPEC) is stumbling, legs like jelly, eyes glazed as the energy world looks on. Its mouth piece, like Mike’s on that fateful night, has been hurled out of reach – the result of a few hard blows in the past year. The facial accessory is OPEC’s safeguard; the cartel’s ability to cut production in response to falling prices, which, with the latest meeting between the thirteen member states ending in acrimony, seems no longer able to protect the teeth it was designed for.

It has been a crude awakening.

POWER PUNCHING: THE RISE TO PROMINENCE

OPEC was formed in 1960, as the five founding members – Iran, Iraq, Kuwait, Saudi Arabia and Venezuela – sought to seize control of their oil reserves in the interest of national development and to compete with the major multinational companies. It was in 1973, however, that the organisation burst onto the scene, imposing an oil embargo on the U.S. and some members of Western Europe in response to their support for Israel in the Arab-Israeli War. Prices skyrocketed from $3 to $13 per barrel; a global recession followed, and the world was forced to stand up and take note. The oil market was never going to be the same again.

The same monumental shock occurred over a decade later, in 1986, as Trevor Berbick’s face hit the canvas and Tyson was declared the youngest heavyweight champion in history. The boxing world was shaken, there was a new name on everyone’s lips, and he was here to stay – for a while.

But behind the mask of power and influence, there was trouble in paradise. Iron Mike was rough, rugged and raw, but unadapted to the new world he had inherited. The smiles associated with a big payday were short-lived, as internal tensions bubbled below the surface. Nevertheless, when push came to shove, business was done; Tyson stormed through all newcomers, while OPEC was pulling no punches when the markets misbehaved.

However, as Stein’s Law states: “if something cannot go on forever, it will stop”. Our protagonist’s inevitable downfall is played out in front of a global audience, and all heads turn to one another looking for an explanation.

THE DECISIVE BLOW: THINGS FALL APART

Tyson’s opponent, Buster Douglas, fought a good fight that night. But an above average performance alone, from a 42-1 underdog, wouldn’t have been enough to send Tyson sprawling. Similarly, just as the influx of U.S. shale oil onto the world market (increasing oil supply) and a slowing Chinese economy (decreasing oil demand) provided a solid one-two combination to the OPEC pricing policy, it shouldn’t have been enough to cripple the organisation. OPEC has weathered price crashes before – in 1986 and 1998, for example – without being counted out.

OPEC’s decline is partly due to a lack of cohesion. Put eleven countries in a room, each with their own agenda, and it’s not hard to see that in-fighting is bound to arise. In previous decades this has been less of a problem; conventional oil has gone relatively unchallenged until recently, so OPEC’s traditional view was to restrict production in response to price collapse. By suffocating supply, prices will increase to curb excess demand.

However the rise of unconventional oil, U.S. shale oil, has certainly contributed to OPEC’s turmoil. Vast supplies of new oil onto the market suppress prices and pose a legitimate threat to OPEC’s market share, which has sprung the ringleader, Saudi Arabia, into action. The short-term pains of low oil prices – also partially due to the slowdown of the Chinese economy – are deemed to be an aspirin worth taking if the higher cost shale oil producers can be forced out of the market. But in practice, the resilience of unconventional oil seems to have been underestimated – producers are sticking around despite the price collapse, prompting many to suggest that the shale revolution is here to stay, much to OPEC’s dismay.

A more disputed explanation involves the strained relationship between Saudi Arabia and Russia, a non-OPEC member. It is no secret that Russia is intent on propping up the Assad regime in Syria, as Putin seeks to establish a strategic foothold in the region – even strengthening ties with Iran, much to the displeasure of Saudi Arabia. In response, Saudi Arabia is looking to teach Russia a lesson, knowing that the Russian economy is falling into a full-blown depression as oil revenues plummet. And with Iran re-entering the market in 2016 after sanctions have been lifted, the intense battle for market share is unlikely to halt in the near future.

In many ways OPEC’s dilemma resembles that of Mike’s on February 12th 1990. Namely, ‘what the hell happens next?’

MIKE CHECK (1, 2): LEARNING FROM THE PAST

If Iron Mike’s past is anything to go by, OPEC’s future could go in three directions:

Business as usual: (1990-1996). To say that Tyson was papering over the cracks during this period is putting it lightly. That he bounced back with eight consecutive wins, regaining the WBA and WBC heavyweight titles by mid-96, is telling only half the story. A rape charge and resulting prison sentence (1992-1995) overshadowed any in-ring success, and it was only a matter of time before the roof caved in and the whole house fell down.

OPEC, like Tyson, has been plagued with internal disharmony throughout its existence. But despite that, it still got the job done when the bell rang. Never, however, has the cartel looked as fragile as it does at present. Saudi Arabia is instigating affairs, ramping up production to control market share at the expense of the interests of other member states. The petroleum sector makes up 85% of Saudi Arabia’s exports and 50% of its GDP, so long-term dominance of the oil market is a major priority. In the short-term, however, OPEC economies that rely on high oil prices to fund government spending are likely to continue suffering sharp fiscal pain, prompting many to call for a change of plan.

As it stands, the business as usual approach strongly depends on the success of OPEC’s (read: Saudi Arabia’s) strategy to crush the U.S. shale competition and regain market share, without risking an open revolt from other member countries. It’s a delicate balance and if U.S. shale is here to stay, OPEC may have another Mike Tyson moment in the pipeline.

Chaos reigns supreme: (1996-2009). The wheels were well and truly off, and unfortunately for Evander Holyfield that wasn’t the only thing. Having beaten Tyson by TKO in late ‘96, Evander found out first-hand, in the rematch of ’97, that Iron Mike had bitten off more than he could chew. The ear biting ‘Madman Mike’ was replaced by ‘Meltdown Mike’ over the course of the new millennium; serious narcotics abuse, prostitute hunting, and the acquisition of a pet tiger were a few of many eyebrow raising moments.

Religious obligations considered, the likelihood of the Saudi Arabian minister following this path is probably on the modest side of 0%. However, the oil equivalent could be an ‘every man for himself’ scenario. At present, the whole is greater than the sum of its parts; OPEC supplies about 40% of the world’s oil, so member states have much more influence together than they do individually. A serious fracture would be required for smaller exporters to decide that they are better off alone. Not to mention OPEC’s loss; fewer members means a lower market share, and less control over the price of oil. On the list of strategies, one would assume that this should fall into OPEC’s ‘last resort’ box.

Don’t call it a comeback…: (2012-2015). Tyson’s tumble to the darkest depths appears to be a thing of the past. An autobiography and one-man show on Broadway, Undisputed Truth; a spot of acting, The Hangover; even his own animated television series, Mike Tyson Mysteries, have redefined the former “Baddest Man on the Planet” as something of a renaissance man, and the future looks brighter than ever.

If we can be certain of anything, it is that OPEC’s future is uncertain. Oil prices are predicted to stay below $80 a barrel until 2020 (they currently linger beneath $40), so the cartel could be feeling groggy for a while yet. During the same time period, OPEC’s total oil production is expected to decrease slightly, from 30.9 million barrels per day (bpd) in 2016, to 30.7 million bpd by 2020.

In the long-term, however, a comeback may be on the horizon; global oil demand is estimated to increase by around 10% by 2040, owing predominantly to the insatiable appetite of rising Asian economies – China’s oil imports are expected to be five times those of the U.S., while India’s will easily exceed the European Union’s.

Eventually, of course, oil is likely to be phased out in favour of low-carbon alternatives. While realistic estimates suggest that this won’t be for a while yet, Norway, a non-OPEC member, is taking steps to adapt to the brave new world. In the past few years it has invested heavily in environmental sustainability, even defining itself as a world leader in carbon capture & storage technology – albeit with limited success. Nevertheless, breaking away from a dependence on oil is likely to be a necessary long-term strategy; Malaysia and Indonesia have successfully diversified as manufacturers, while Dubai has attracted foreign investment in infrastructure, services and business.

One thing is for sure: when speculating about the future of oil, there is no such thing as the Undisputed Truth.

James Davies

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Close