Generation RENEW: Energy Transition Underlies An OPEC Skirmish

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?

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. 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.

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This article first appeared on Eagle Global Advisors' Generation RENEW Blog at eagleglobal.com/generation-renew