Book Review: OPEC and the World’s Energy Future: Its Legacy and Promise

A distinguished energy economist and former director in OPEC’s Information Department and News Agency, Dr. Mohammed Alshalawi brings considerable experience to bear on what are perhaps the most complex geopolitical questions of today, the future of OPEC, its legacy and promise. While embarking on his career as a promising young energy economist in Saudi Arabia, Dr. Alshalawi was witness to sensitive and complex diplomatic negotiations including such harrowing events as the siege of OPEC by Carlos the Jackal in 1975. Years later as a director in OPEC in the 1990s, he was entrusted with negotiating a diplomatic solution to Greenpeace protests at OPEC’s Vienna headquarters in 1992. In 1999 to 2002 Dr. Alshalawi was a member of the first advisory board of the Saudi Arabian Supreme Economic Council, a group that helped steer a steady course despite rising non-OPEC production and large levels of global spare capacity. Beautifully illustrated by Canadian artist Greg Stoicoiu, the book examines OPEC’s history and future promise, highlighting differences among OPEC member countries and the complex interrelationships between international economics, politics, and technical progress.

Part I, Pre-OPEC, begins with the birth of the oil industry. The first commercial patent for the use of oil was granted to Archibald Cochrane 9th Earl of Dundonald in 1780. Lord Cochrane was hailed as the father of the British tar industry, harvesting, and storing bituminous coal for use on the bottom of masts and ships (Luter 2005). Dr. Alshalawi goes on to explain the evolution of the world oil industry in terms of the rise and fall of dominant companies and institutions from the four pre-World War I majors—Shell, Standard Oil, Nobel, and Rothschild—to the effective dissolution of the Russian companies following the Russian Revolution of 1917. ¹ The pre-OPEC period ends with the rise of the Seven Sisters ² and near complete vertically integrated market structure of the 1940s and 1950s.

In the next section, OPEC Evolution, Dr. Alshalawi attributes the rise of OPEC to the need for an organization to unite the developing crude oil producing countries in difficult circumstances, despite considerable mistrust among competing oil companies and countries. This refreshing perspective assigns the group a unique and enduring diplomatic role which transcends pure economic consideration, and when seen in the light of the post-Covid energy transition is even more relevant today.

In the earliest days of OPEC, international coordination between oil producers was set by Saudi Arabia and Venezuela to counteract the monopoly power of the oil majors. The group had little influence over price until the Tehran agreement was signed in February 1971. Rising oil demand and the oil crisis gave the group sufficient power to replace official posted prices with the Saudi Arabian light crude oil price in 1973.

The decade of the 1970s solidified the textbook notion of OPEC as a cartel. However, Dr. Alshalawi suggests that this title might well be disingenuous. In his words, “The price crash of 1986 pushed OPEC to the edge. The organization had little choice but to deal with the oil glut collectively and individually.” Saudi Arabia “had to play the swing producer on account of its market share and production growth.” (p.6) OPEC adopted both production quotas and a reference price as its main policy tools, but market uncertainly continued despite these efforts. Price volatility was aggravated by a growing list of environmental considerations. Accordingly, OPEC became one of the key players for climate change interests during the Rio Earth Summit of 1992. The challenge to provide and promote clean energy while simultaneously providing fossil fuels as an engine for economic development in the world and OPEC member countries remains a top priority for OPEC member countries.

Part II describes the evolution of OPEC’s role on world oil market. Since its founding days, OPEC has been an inter-governmental body representing the main crude oil producers from developing countries. The organization’s primary goal has been to unify the pricing and producing policies of member nations while simultaneously maintaining market stability and a fair price for oil. As the producing countries matured and assumed control over their oil and petroleum resources, OPEC’s role gradually began to evolve. The group became a type of residual or swing supplier acting as an administrator in control of price stability. The role continued even when the group was losing market share to the non-OPEC producing nations.

Early results, and the implications for world oil prices, were surprisingly close to theoretical model predictions. Celta and Dahl (2000) maximized OPECs social welfare from its own oil production including both the domestic and export markets. The study estimated a theoretical base case export price of $14.21 USD per barrel in 1995, remarkably close to the average annual price of OPEC crude of $16.86 recorded in that year (Statistia, 2022).

As OPEC began to find its way onto the world stage, it began to interact productively with consumers, environmentalists, and assemblages such as the United Nations (UN), World Energy Council (WEC), International Energy Agency (IEA), and the Organization of Economic Cooperation and Development (OECD). The sphere grew to include the key Independent Petroleum Exporting Countries (IPEC), including the Russian Federation, Norway, Mexico, China, and the State of Texas. OPEC’s image gradually changed towards a more positive one and the organization began to participate in a growing number of environmental protection programs, climate change meetings and workshops, and humanitarian initiatives such as the 1995 oil-for-food program in Iraq.

The second section on OPEC’s Internal and External Rivalries discusses the diplomatic challenges posed by internal division and politics. From sparring over the coveted appointment of Secretary General to heated conflict over production levels, market share, and the general level of oil prices, there has been no shortage of potential flash and division points. As OPEC membership and notoriety grew, so did the list of grievances.

The most divisive of these came to the forefront during the 1967 and 1973 Arab-Israeli wars and resulting weaponization of the oil industry during the Arab Oil Embargo of 1973. By the Iranian Revolution in 1979 OPEC had been divided into two camps,

• (i) The Doves, countries with high reserves, low production costs and high production rates, such as Saudi Arabia, Kuwait, and the UAE. The doves advocated a low oil price, and higher output to increase oil revenues.

• (ii) The Hawks, countries with lower reserve levels and higher production costs including Iran. The hawks tended to advocate lower production rates and higher global oil prices.

The division dominated OPEC internal politics for decades often compelling Venezuela and the OPEC Secretary General to adopt the role of mediators during heated negotiation periods. Paradoxically, the dove-hawk division has become blurred in recent years as unprecedented geopolitical upheavals such as Covid and climate change turn doves into hawks and vice versa. To cite only one example, in April 2020 at the 10^th (Extraordinary) OPEC meeting, the OPEC+ member countries led by Saudi Arabia agreed to a staggering 9.7 MMB/d production cut to stabilize markets during the Covid-19 lockdowns.

Dr. Alsahlawi goes on to list additional sources of geopolitical tension including Saudi Arabia versus OPEC, OPEC versus the world, OPEC versus Non-OPEC, OPEC versus the U.S., and Saudi Arabia versus the U.S. The conclusion—that these rivalries have been contained by careful Saudi diplomacy repeatedly through history—draws the reader’s attention to the value of OPEC as global diplomat during the period of volatile oil prices and extreme political divisions that will almost certainly accompany the energy transition. Saudi Arabia’s motivation to continue to be the dominant player in OPEC rests on the cost-benefit analysis of its political bargaining power inside and outside of the Organization.

The section concludes with the observation that “Saudi Arabia apparently feels ‘some obligation’ to hold OPEC together and keep the world oil market sustainable and stable despite the waning importance of OPEC and oil in the medium -to long-term.” (p.14) The extent of Saudi Arabia’s resolve to continue to lead the Organization remains to be seen. For the time being, the Quincy pact, and U.S.-Saudi relations guaranteeing the United States a supply of Saudi oil in return for the protection of oil shipments from the Gulf to the markets remain a steadfast and steadying feature of energy politics. ³

Part III, Energy Technology and OPEC, discusses the effects of technological progress on the future of global energy markets. At the time of writing, approximately 45% of cumulative CO₂ emissions were caused by the consumption of coal, while 50% resulted from the consumption of oil and gas (Granger and Keith, 2008). Consequently, the application of environmental policies such as a carbon tax can be expected to have negative consequences for the global demand for oil. At the same time, the movement from one source of energy to another involves significant economic costs and can entail lifestyle changes and abrupt adjustments in established economic and social development patterns.

Dr. Alsahlawi argues convincingly that technology, now more than ever, can be expected to shape the future of OPEC, in terms of energy supply and demand. Over the long run, the price of renewables, conventional and nonconventional oil supplies will be reduced significantly by cost savings resulting from technical progress. The reduced cost, in turn, should result in more demand. However, in a complex interplay of economic forces, technological progress on the demand side will lead to increased economic efficiency and conservation, or the better use of energy supplies at lower prices.

While technological progress has sparked the rapid development of renewable energy technologies, a thorough economic evaluation of these technologies should be conducted prior to their implementation. According to the author, solar and wind energies are the most feasible technologies as of 2020. Both satisfy low-carbon requirements and reduce global warming. However, their ability to maintain efficient and effective electricity generation and distribution and end-use consumption will require further advances in technology. Ultimately, the economics of energy efficient technology will continue to take center stage in the long run, with reduced greenhouse gas emissions, natural resource management, moderate energy prices and sustainable development goals considered to be clear international priorities. The fortunes of renewables and unconventional oil and gas technologies will rise and fall with global energy prices.

Part IV defines the forces shaping the future of energy. The main influences are economic growth, population growth, energy security, energy supply, macroeconomic policies, technology, environmental impacts, energy policy, and energy prices. Since the earliest days of the energy industry there have been incessant changes in the process of dealing with energy. The author maintains that technological development will precipitate some form of economic and social change, necessitating the need for new policies, regulations, and technical and economic support. For example, globalization and the rise of competitive markets inspired the rise of major trading houses such as Vitol, often at the expense of OPEC’s share. According to Dr. Alsahlawi, in the future “OPEC should take the lead in oil trading which would increase its market share and economic power.” (p.41)

The major challenge facing OPEC today is undoubtedly the issue of climate change and global warming. The secondary challenge concerns economic growth and living conditions. To cite two examples from the text: (i) The global financial crisis of 2008 had severe ramifications for global energy markets, and living conditions, and (ii) Rapid economic growth in China at the beginning of the 21^st century had profound implications for global energy demand, and GDP growth throughout the world. Additional challenges include the transition from conventional energy to renewables in the generation of power, the rise of digital technology for data collection and the real time monitoring of global energy supplies and demand, and trading.

The author concludes with an in-depth look at the reason for OPECs relevance to world oil markets. Part V, OPEC’s Existence, outlines the major challenges that OPEC can be expected to face in the not-too-distant future. According to Dr. Alsahlawi, the most important challenge is the maintenance of oil security throughout the energy transition. A closely related issue concerns the need to invest in OPEC spare capacity at a competitive price, despite geopolitical forces supporting rapidly rising renewable energy supplies. The challenge to OPEC is to remain a leading player in the oil industry while simultaneously supporting future investments in green and renewable energy supplies.

In the section entitled OPEC’s Gloomy Future, the recent trend towards the privatization of National Oil Companies (NOCs) among OPEC member countries, is discussed in considerable detail. Specifically, privatizations such as the Saudi Aramco IPO in November 2019, are a harbinger of the weakening and eventual demise of OPEC. To summarize the argument, the trend towards privatizations since the 1990s has the potential to lead to a restructuring of the oil industry towards more privatizations and away from reliance on OPEC. If this trend were to continue, OPECs role on world oil markets could diminish, and the organization might even be abolished.”

In the final segment of Part V, Dr. Alsahlawi imagines a “World without OPEC.” The section poses a simple question: What would the market structure be without OPEC? In the author’s opinion, there are three possible outcomes: (i) Perfect competition at a price level that reflects the marginal cost of production, (ii) One or two giant producers without any formal cohesion, and (iii) One dominant big producing monopoly. The result is almost certainly an unstable, hybrid of pre-eminent market forces and newly emerging sizeable NOCs.

Part VI, Side Issues, addresses the uncomfortable issues of Qatar’s defection from OPEC, the 1991 oil spill in the Gulf, the 1990 Kuwaiti oil fires, the oil price crashes of 1986, 1997, and 2008, the Saudi-Russian price war, the Iran-Iraq war, and the ongoing effects of Covid-19. All these issues underscore the need for unity, and the diplomatic skills of an organization, such as OPEC to calm oil price volatility at times of crisis, severe economic malaise, and war.

Finally, in the last chapter, Dr. Alshalawi attempts to answer the “big question” itself. What is the point of OPEC? In his view, the world has come to view OPEC as a safety valve, to be triggered when the market becomes saturated with oil. Other future benefits are for OPEC to become the leading source of information on the oil industry, and to function as an umbrella or haven for member countries to negotiate conflicting and often contradictory positions on economics, climate change, and the future of energy technology. There are clear global benefits from OPEC policies. Pierru and Smith (2020) find that OPECs policies, specifically the use of spare capacity to stabilize world oil prices have succeeded in reducing oil price volatility from 19.3% in 2017 to only 7% in 2019, resulting in an annual increment to global GDP of approximately $175 billion USD, or 0.2%.

OPEC and the World’s Energy Future is a fascinating and informative examination of the legacy and promise of OPEC. The work profits from the author’s years of experience as an international energy economist and firsthand knowledge of the Saudi Arabian energy industry and policies. The chapters are filled with a wealth of knowledge and insights that are not available in any comparable source. It can be considered essential reading to those studying the evolution and prospects of the oil industry.

Jennifer Considine University of Dundee