By Charles Ellinas
Following the OPEC+ (OPEC plus Russia) agreement on Sunday to raise crude oil production by 400,000 barrels/day each month, starting from August, Cypriots should see a fall in fuel prices at the pumps – possibly by around 5% – at least for now.
As a result of this deal, OPEC+ oil production will have increased by 2 mln bpd by the end of 2021, returning to pre-pandemic levels by the end of 2022.
Last week, while OPEC was negotiating oil production quotas internally, Brent crude rose to almost $78/barrel; since the announcement of the agreement prices fell back down to $69/barrel.
This will not only help ease the pressure on fuel prices, but also on inflation – which correlates to the oil price – as economies around the world recover after pandemic lockdowns.
However, OPEC’s relatively slow pace of output increases is indicative of concerns about the strength of the global recovery as Covid-19 variants continue to emerge. Nevertheless, oil demand is expected to keep rising, as economies come out of the pandemic, eventually putting pressure on prices.
These developments send warning signals to the EU and the US, as they push for a rapid switch to clean energy, away from oil and gas. While that may be the ultimate goal, at the same time they do not want fuel prices to rise so quickly that they put the brakes on economic recovery – especially since, as things stand today, climate ambition appears to remain far ahead of reality.
Having avoided a damaging split, the agreement restores and even increases OPEC’s power over the world oil market. It is also a clear sign that OPEC is keen to continue managing oil markets.
The firm approach by OPEC+ to not overproduce has proved to have been successful. Clearly, it is in the financial interests of OPEC+ to keep oil supplies under control.
Global demand not easing
Oil demand does not appear to be easing, even with the rapid growth of electric vehicles (EVs) around the world. Despite this growth, under existing policies, the International Energy Agency (IEA) expects EVs to increase to only 7% of the increasing global road vehicle fleet by 2030.
Europe is determined to hasten this, by proposing tougher standards in its newly announced ‘Fit-for-55’ package to reduce vehicle carbon emissions, targeting 100% reduction by 2035. This is equivalent to a ban on the sales of new internal combustion engine cars by that time.
However, this is meeting resistance by the car industry and some EU countries, and it remains to be seen what its final version will be.
According to the IEA’s base-case scenario, after recovering from the pandemic, without strong policy change, world oil demand will rise from 97.9 mln bpd in 2019 to pre-pandemic levels by end of 2022 and to 104.1 mln bpd in 2040. The IEA has, in effect, conceded the world will need oil and gas for some time to come, as renewable producers play catch-up. On this basis peak oil demand is some way away.
As international oil companies (IOCs) – under pressure from activists, western governments, financial institutions and legal challenges – transit their operations away from oil and gas to clean energy, national oil companies (NOCs) are ready to step in to replace any reductions in IOC oil production.
Already, Saudi Arabia has announced plans to boost its oil production capacity from 12 mln bpd to 13 mln bpd, with Russia’s Rosneft ready to follow suit.
IOCs face even more pressure after IEA’s latest ‘Roadmap to net-zero by 2050’ report, which says oil companies would have to stop all new oil and gas exploration projects from the middle of this decade if global warming is to be kept in check. The NOCs do not appear to be ready or interested to heed this.
These developments are what led Saudi oil minister and OPEC chairman Prince Abdulaziz bin Salman, to say after the OPEC+ agreement, “we are here to stay. What bonds us together is way beyond what you imagine.”
Clearly, OPEC matters. With IOCs investing less, and drilling and producing less, OPEC’s control of the global oil supply and the oil price is stronger now than it once was, and becoming even stronger. As OPEC keeps the oil market tight, it no longer needs to worry that it will lose market share to non-OPEC producers.
At least over the next few years, with the world expected to see a significant economic expansion, oil demand will increase and OPEC+ will be there to provide it.
Impact on Cypriot consumers
The main contributor to the 3.1% rise in inflation in Cyprus in June was the increase in energy costs. Year-on-year oil product prices rose by 22%, electricity prices – highly dependent on oil – by 17% and transport costs by 11%.
As indicated earlier, in the short term with oil prices coming down, fuel prices and inflation will also come down. But these are likely to rise again later in the year as oil demand picks up in response to increasing economic activity as the pandemic continues to recede.
But in the longer-term, another major factor may enter the equation and disturb the apple cart. The European Commission (EC) announced last week that it intends to extend the carbon Emissions Trading System (ETS) to the transport sector, so that it can reduce the 22% contribution of the sector to EU’s total carbon emissions. It is targeting 100% reduction in such emissions by 2035.
This is designed to make motorists, including Cypriot motorists, pay for the pollution they produce. Owning a petrol or diesel fueled car will become increasingly more expensive and beyond 2030 it may even become near-impossible.
The electricity ETS system cost Cyprus about €85 mln in 2020. Since then, carbon prices increased by 250% and are likely to increase by 500% by 2030, increasing such costs by a factor of five.
In addition, Cyprus paid €40 mln this year for not achieving its 2020 target to provide 10% of its transport fuel mix from clean sources, such as biofuels.
Cyprus’ existing National Energy and Climate Plan (NECP) to 2030 does not give any confidence that these problems will be resolved. On the contrary, with the ETS system extended to include transport, heating, aviation and shipping, they will increase.
As always, the cost will be passed to the Cypriot consumer. Only radical re-thinking of our energy policies and a faster, deeper, transition to clean energy can bring costs down.
Dr Charles Ellinas is a Senior Fellow at the Global Energy Center, Atlantic Council