The OPEC break that could shake oil prices — The Take

[0:00] Today, more trouble in the Strait of Hormuz. [0:03] The United Arab Emirates says it has intercepted a number of missile strikes from Iran. [0:08] A large fire has broken out at a petroleum facility in the port of Fujairah. [0:13] As Iran attacks the UAE again, we look ahead to a long, hot summer of energy shortfalls. [0:21] I'm Kevin Hurtin, and this is The Take. [0:23] Before we continue with today's show, remember to leave us a comment telling us what you think [0:33] about this episode. [0:34] We do read them, and it helps us shape future episodes. [0:38] What do you think about this topic? [0:39] Are you worried about the energy shortfalls that are coming this summer? [0:43] And if you're on your favorite podcast app, remember to leave us a five-star review. [0:47] It does help the show. [0:52] I'm Jim Crane. [0:53] I'm the Diana Tamari Sabag Fellow for Middle East Energy Studies at Rice University's Baker [0:58] Institute in Houston, Texas. [1:01] So, Jim Crane, it's great to have you on The Take. [1:04] So, for those who don't know your backstory, you're an author. [1:08] A former newspaper reporter and now a leading authority on Middle East energy geopolitics. [1:14] So, in short, you're a perfect person to talk to as we head into, you know, what could be [1:19] a very long, hot, and I think turbulent summer. [1:22] So, just to sort of set the scene, the price of oil has really skyrocketed since the war [1:29] in Iran. [1:30] The global benchmark price, Brent, hit $126 a barrel last week. [1:35] So, that's about $20 short of the all-time record back in 2008. [1:39] So, I guess, Jim, for starters, how are you feeling about the moment we're in right now? [1:44] Are we overreacting or underreacting? [1:46] How does this crisis rank for you? [1:50] Well, you know, as far as crises goes, I mean, there's a lot more than the oil price [1:54] in it. [1:55] So, if you look at the oil price side of the crisis, I'd say, you know, we are reacting [2:00] probably about right. [2:02] I mean, I'm not somebody that likes to second-guess oil market traders and, you know, folks that [2:09] have all that trading algorithms and, you know, supercomputers, et cetera. [2:15] So, you know, price is probably about right for the moment that we're in because there's [2:22] so much uncertainty in both directions. [2:25] I mean, you know, President Trump could escalate this thing an hour from now, or he could call [2:29] it off an hour from now. [2:31] So, I think traders are being cautious, you know, around the oil market. [2:37] As far as other things outside the oil market, you know, I think we're a bit worse off, right? [2:42] So, LNG, that liquefied natural gas, is not flowing out of the Strait of Hormuz. [2:48] That's a big problem. [2:48] That's about a fifth of that market. [2:51] And countries that are dependent on that are having a really hard time. [2:55] So, mostly in Asia, South Asia and East Asia. [2:59] Japan and South Korea are tapping into strategic reserves, while developing countries like Vietnam, [3:04] Cambodia, Thailand, and the Philippines are rationing fuel and closing gas stations. [3:10] In India, protests have erupted over surging prices and acute shortages. [3:16] Fertilizers for, you know, for crops, you know, so farmers are running short on that. [3:22] Prices are going up. [3:23] You know, other things, sulfur, which is also used in fertilizer. [3:27] It's used in metals refining. [3:30] That's also in short supply. [3:32] Aluminum, other things, petrochemicals. [3:35] So, big crisis. [3:37] You know, if you lump all those together, you know, it's biggest global economic crisis that [3:44] I've ever covered. [3:46] Yeah. [3:46] And the 1973 crisis didn't have a lot of those factors. [3:50] Okay. [3:51] Jim, I got some news I want to get you to comment on. [3:54] Fujairah's media office says a large fire broke out at the petroleum industrial site [3:59] in the Emirate after a drone attack from Iran. [4:03] Interesting. [4:03] So, it sounds like things are heating up again if Iran's sending drones across the strait again. [4:09] You know, that's their main export terminal right now is Fujairah for the United Arab Emirates. [4:14] So... [4:14] Is that on the kind of the Gulf of Oman side? [4:17] It is. [4:19] It's just outside the strait. [4:21] So, it's still very, very close to Iran. [4:23] It's uncomfortably close to the Strait of Hormuz. [4:26] But is that... [4:27] There is one... [4:28] I know that there's something on the UAE that's on the other side of the strait, and [4:32] they've been putting a lot of stock in that, saying like, well, we don't really need to [4:36] go through the Strait of Hormuz because we have this other option. [4:39] Is that what they attacked here? [4:40] That's what we're talking about. [4:42] Yeah. [4:42] So, there's a second oil export terminal outside the strait at Fujairah. [4:46] That's right. [4:47] Yeah, about 1.5 to 1.8 million barrels a day of capacity through the pipeline, the bypass [4:54] pipeline in that terminal. [4:55] So, it's not the full capacity of the UAE, of course, right? [4:58] So, their export capacity is more, you know, three and a half to four, but it's still a [5:05] nice chunk. [5:06] Wow. [5:07] Okay. [5:08] This is big. [5:08] Yes, if that's lost, if that goes offline, oil prices are going to spike. [5:13] Really? [5:13] Like, I mean, how much higher can they go? [5:18] I mean, there's a lot of oil that's being depleted from storage now. [5:21] So, the longer this goes on, the longer the strait stays closed, you know, and also those [5:27] stock levels are brought down. [5:30] I mean, oil price is going to have to respond. [5:32] I mean, that's what it does. [5:34] You know, it's fewer people are going to travel, you know, airlines are going to be cutting [5:38] flights, you know, countries are going to get involved in rationing. [5:42] I mean, some of this stuff has already started. [5:44] It's going to continue, you know, and eventually it's going to start trickling into inflation. [5:49] You know, countries are going to try to avoid this because it's, you know, it's inflation [5:54] is dangerous. [5:55] It's a trigger for unrest and instability. [5:57] You know, fuel price inflation is bad, but food prices are also something we have to worry [6:03] about, you know, because of the fertilizer and the energy inputs into food. [6:08] So, hopefully, you know, we'll see some compromise some point soon so this doesn't play out in that [6:14] way. [6:15] Yeah, yeah. [6:16] So, amidst all the financial pain, one winner might be renewable energy, and there are a [6:22] lot of signs. [6:23] Albania's vast supply of renewable energy is cushioning its consumers from oil and gas price [6:29] hikes due to the Iran war. [6:31] It's a potential model which analysts say could help protect other households from steep price [6:36] rises and bolster Europe's green energy transition. [6:40] Countries like Italy, Germany and Greece are gas dependent but are trying to increase capacity [6:45] for solar power. [6:46] The Financial Times reports that investors have pumped more than $3 billion into clean [6:51] energy ETFs in April. [6:53] Now, that's the largest monthly inflow in five years. [6:56] The S&P clean energy transition index is now outpacing oil stocks. [7:01] I wonder how you interpret this. [7:03] Is this renewables momentum or is this just panic money that will evaporate when the stability [7:10] returns? [7:10] Probably a bit of both. [7:13] I mean, it makes sense. [7:14] So, renewable energy supply chains are just much, much more secure than fuel-based supply [7:21] chains because renewables don't use any fuel. [7:24] So, when you plug them in and connect them to the grid or connect them to your house, there's [7:29] no supply chain anymore. [7:31] They're just getting their energy from moving air or from sunshine. [7:37] So, fuel-based systems like those that use oil, gas, and coal need those supply chains [7:44] to stay connected 24-7, 365, any hitch, and the lights go out. [7:50] And the hitch could be anything from bad weather to an earthquake or tsunami or war, politics, [7:56] extortion, undersea fines, or whatever it is, right? [8:00] So, lately, geopolitics has been really fraught, of course, right? [8:05] So, transit risk is the one we're looking at, and the Strait of Hormuz. [8:09] So, if you're an importing country dependent on that part of the world, getting tired of [8:14] the risk, you're getting tired of the damage to your economy, renewables make sense. [8:18] It looks like a good substitute in the power sector, especially, and for some personal transport. [8:25] You know, you still need fossil fuel-based backup for, you know, longer-term backup. [8:31] But, you know, it's not foolproof, but it is a good substitute, and it's improving all the time. [8:37] Yeah. [8:38] And, you know, there's been a lot of reporting about the European renewables market. [8:42] Firms like Nordex, Ørsted, Siemens Energy, all seeing double-digit increases. [8:47] But I do want to ask you about how this crisis might spur renewables push in, like, the global [8:51] south. [8:52] And I'm talking especially about countries with close ties to China, which, you know, [8:56] as you know, is one of the world's largest producers of solar and wind. [9:01] There are thousands of wind turbines like these dotted across the country, [9:05] and hundreds more being built every year. [9:07] Together, they produce about 10 percent of China's total energy needs. [9:12] The global south is supposed to be an area of real growth in the coming decades [9:17] for the big oil companies. [9:19] Do you think China could scramble their plans a bit here? [9:23] Yeah, I do. [9:24] I think they already are. [9:25] China has built an enormous manufacturing capacity in renewables, in batteries, in electric vehicles. [9:33] And over the decades, past few decades, they've kind of been assembling all the pieces of this [9:38] through central planning top-down, you know, targeting their own market, electricity, [9:43] electricity, as a strategic sector, trying to electrify as much of the economy as possible [9:48] with some success. [9:51] They've gained control over mineral supply chains as part of that. [9:55] And then they've, you know, they've tasked their own manufacturing capacity to increase [10:00] their capacity in, you know, solar panels, wind, batteries, and now EVs. [10:04] And that stuff is flooding the domestic market. [10:09] And it turns out there's overcapacity, right? [10:12] So too much capacity for the Chinese market. [10:15] The Chinese grid not keeping pace with generation insulation there. [10:21] So, you know, some of this stuff is being curtailed. [10:23] So they're really looking to the outside world for a new market for all that excess capacity. [10:28] They need a new source of demand for that. [10:31] And that is everywhere else. [10:33] So the U.S. and the E.U. have set up some tariffs because they view this as dumping, [10:40] you know, this cheap stuff. [10:41] So now that kit is all flowing to the developing world, or a lot of it is. [10:46] These are exactly, as you said, the countries that were supposed to be the growth markets [10:51] for oil and gas. [10:53] And now we've got all this cheap renewables flowing there. [10:56] I mean, you know, Pakistan last year, 17 gigawatts of solar panels in a country whose entire grid [11:04] was only 47 gigawatts. [11:06] It's like a third of their total installed capacity. [11:10] A decentralized solar boom, driven largely by households, farmers, and businesses, has [11:16] helped reduce dependency on fuel import. [11:19] According to a study published last month, the uptake of solar around 2018 has helped Pakistan [11:25] avoid more than $12 billion in oil and gas imports up to February this year. [11:31] At projected market prices, it could save a further $6.3 billion by the end of this year. [11:38] So yeah, it's a big story. [11:40] It is a big story. [11:41] I mean, China has increased supply or extra supply, and now there's suddenly this huge demand. [11:46] Let's move to some of this OPEC drama. [11:50] The United Arab Emirates has pulled out of the oil-producing bloc. [11:54] The UAE has released a statement saying, [11:57] this decision aligns with the UAE's long-term strategic economic vision and the development [12:03] of its energy sector. [12:05] It's also driven by national interests and the country's commitment to actively contributing [12:10] to meeting the urgent needs of the markets. [12:13] And there's really a lot to unpack here, and this is a little bit technical. [12:16] So can you tell us kind of what OPEC is, why this happened, why UAE pulled out, and really [12:24] how significant it is for OPEC to lose the UAE, which is its third largest producer? [12:30] Yeah, sure. [12:30] Well, you know, OPEC, of course, is the oil-producing cartel, you know, started in 1960 in Baghdad. [12:37] UAE was one of its earliest members, right? [12:40] You know, the UAE took part in the Arab oil embargo of 1973, you know, sort of when the [12:45] rest of the world really found out about OPEC, caused a lot of pain back then. [12:51] The Middle East war produced developments all over the world today. [12:55] The oil-producing countries of the Arab world decided to use their oil as a political weapon. [13:00] They will reduce oil production by 5% a month until the Israelis withdraw from occupied territories. [13:07] Over the years, you know, OPEC has been more of a source of stability in oil markets rather [13:16] than disrupting a factor. [13:20] And then when shale oil kicked off here in the United States, you know, around 2007, U.S. [13:25] oil production ramped up so quickly that OPEC began to lose some of its market power, and [13:32] they needed to bring in another big producer to re-establish it, and that was Russia. [13:37] So in 2016, OPEC Plus was formed, Russia was pulled in, and now you have this key partner [13:45] of Saudi Arabia, the United Arab Emirates, that is pulled out, right? [13:50] So this is a rare oil producer that has lots of spare production capacity right now that [13:56] it can bring online, you know, under normal circumstances when the straits open. [14:01] So it's a big deal for OPEC. [14:03] I mean, prior to the UAE leaving, all the other, you know, quitting countries were pretty minor [14:10] producers, didn't really affect the market power of OPEC. [14:14] This is different, right? [14:15] UAE was not a great fit for the cartel. [14:19] So some colleagues and I wrote about this, you know, UAE has had the largest, most intrusive [14:26] quota. [14:27] So the most amount of production offline of any OPEC country by far in recent years. [14:33] It's a wealthy country. [14:35] It's got a more diverse economy. [14:37] It's different than the other countries, which are more kind of old-line petro states. [14:42] So when you say the quota differential, you mean that UAE wants to produce like 5 million [14:48] barrels a day, but the quota that OPEC puts on its countries means it can only do, you [14:52] know, 3 million. [14:54] Yeah, that's exactly right. [14:55] So it's, you know, UAE over the past few years has been ramping up investment, moving from [15:01] 3 to 5 million barrels a day, but its quota has still been below 3 or now it's, you know, [15:06] just over 3. [15:08] So really leaving a lot of money on the table, a lot of production idled, you know, that has [15:13] spent billions of dollars investing in. [15:16] So big incentive to move away, but it also has a much more diversified economy. [15:20] So it's not as affected by swings, volatility in the oil market anymore. [15:27] Okay. [15:27] Well, there's still a lot of questions surrounding this. [15:29] I mean, for UAE, they could just ignore the quotas. [15:32] I think Kazakhstan has quotas that it just blasts through. [15:36] There's a lot of speculation that this move by the UAE was at the very least highly encouraged [15:41] by the United States. [15:42] Um, why would the U.S. want, uh, the UAE out of OPEC? [15:48] Yeah. [15:48] So the, the, the UAE actually has been blowing through its quotas. [15:52] It's, it's been kind of a, a perennial quota cheater for a while, but it, yeah, I mean, [15:58] it's, but, but not at the scale of the spare capacity that it has. [16:02] Right. [16:02] So on, on, uh, closer relations with the U.S. and the U.S. [16:08] Uh, encouragement. [16:09] Yeah. [16:10] I mean, so I think that is part of this, right? [16:14] So, you know, I think, you know, Abu Dhabi and, and, and, and, and the UAE overall, they [16:18] have a, they have bigger ambitions on the global stage. [16:22] I think they see themselves being held back by being a member of this producer's cartel [16:28] that, uh, you know, concentrates on, you know, keep, you know, adjusting prices of, of, of, [16:33] of a, uh, commodity that, you know, I think they find that a little bit onerous. [16:37] What is the, let me ask you this. [16:39] What is the advantage to a member state of OPEC and what do you think the consequences [16:45] will be on the international oil markets of the UAE pulling out? [16:49] So for a small country, you know, if you, if you think about Equatorial Guinea or, uh, [16:54] you know, one of the, you know, the smaller countries, they don't have much clout within [16:57] the cartel, right? [16:59] So they're not going to swing, uh, you know, a decision one way or another in their behalf, [17:03] but, but it gives them this sort of imprimatur of, of being sort of a mover and a shaker on [17:07] the global stage. [17:08] They get some geopolitical stature out of this, they get the, an inside line on OPEC [17:14] oil market strategy. [17:15] And when their minister or their president is out of the international stage, you know, [17:20] people tend to listen to them a bit more because they're within OPEC and they're privy to a [17:24] lot of interesting discussions and decision-making. [17:26] And the second question is, is, um, is what are the consequences now? [17:31] And I think the, the consequences that there's going to be more volatility in the oil market. [17:36] So why is more volatility a bad thing for the oil market? [17:40] Yeah. [17:41] Volatility, you know, is, uh, is, is horrible for, for countries that have to deal with it [17:47] because, uh, you know, oil. [17:49] And if you think about oil as a transportation service, uh, you know, that, you know, everything [17:55] is transported, right? [17:57] We, we bring stuff in and out of our countries and move it across the national boundaries within [18:01] our countries all the time that takes oil to do that. [18:03] So it drives the prices of everything up and it, you know, kind of pushes into inflation. [18:09] Uh, and, uh, inflation is a key, uh, a trigger for, for anti-government sentiment, right? [18:15] So if, uh, you know, if prices are going up and your, your income is going down, uh, relative [18:19] to prices, um, you know, people start to turn on the government pretty quickly. [18:24] So this is something that can trigger, uh, you know, unrest, a lot of anti-government sentiment, [18:29] and, you know, the incumbent head of state might get thrown out at the next election. [18:34] Yeah. [18:34] I mean, so, okay, just to, that's the, exactly the sentiment we can sort of end on. [18:38] I mean, the question is when, right? [18:41] I remember hearing that, that by mid April, the rubber was going to meet the road, uh, [18:45] that we start seeing those shortages and look, I don't want to underplay like how much people [18:48] are struggling out there, but it's now may the world is still relatively normal. [18:53] But I mean, it's all that oil that, that left before the war, is that all going to start [18:57] getting used up? [18:58] I mean, is there going to be like, I heard somebody describe this as, this is a problem [19:02] of molecules. [19:03] At what point are we just out of enough molecules and we do start seeing these jet fuel shortages, [19:08] empty gas pumps, fuel rationing? [19:11] It's kind of a country by country thing. [19:13] So in some places it's happening already. [19:15] I mean, countries that have huge amounts of oil and storage are running those stocks down, [19:21] but they still have some kind of a comfort level. [19:23] So, you know, Japan is probably the one that has the, the biggest comfort level, right? [19:28] They had more than a year's worth of storage in their private and in their public stocks. [19:34] China also has a, you know, really large, uh, cushion. [19:38] So more than a billion barrels of oil and storage when the conflict kicked off. [19:42] US, our, our street strategic petroleum reserve was half empty when, when the, uh, when the [19:48] war started. [19:49] So we're not in as good a position, uh, in terms of strategic stocks, but we're, you know, [19:55] we are, we're a big producer, right? [19:56] So, but countries that don't have, that don't produce and that don't have strategic stocks [20:02] or not enough strategic stocks are in a tight spot and it's going to get tighter. [20:06] So think about Pakistan, think about Bangladesh, landlocked countries like Nepal, the Philippines [20:12] is one I hear, been hearing about a lot about lately. [20:15] Uh, so, um, yeah, I mean, they're, they're, they're, uh, varying degrees of, uh, of, of emergency [20:21] already. [20:23] Scary stuff going into what's going to be a hot and long summer, um, Jim Crane, thank [20:27] you for coming on the take today. [20:28] Indeed. [20:30] Yeah. [20:31] Thanks for having me. [20:32] Appreciate it.