Why OPEC’s Long-Term Strategy needs regular reviews
By : Wael Mahdi
:: It was in Saudi Arabia in November 2007, only a few days ahead of the third summit of the Organization of the Petroleum Exporting Countries (OPEC) heads of state, that I met with one of OPEC’s former secretary-generals, the Ecuadorian Rene Ortiz.
Ortiz, who headed OPEC between 1978 and 1982 when oil prices skyrocketed after the Iranian revolution and the Iran-Iraq war, discussed the beginnings of a Long-Term Strategy (LTS) for the organization.
He said that OPEC acknowledged that China might consume more oil following its decision in 1974 to liberalize a small part of its economy. Yet none of OPEC’s officials expected China to carry on its economic liberalization to make it the major oil importer it is today. Not only did they underestimate China’s growth, but they also completely misjudged India’s economic potential at that time, Ortiz added.
The whole idea of the LTS was born in the mind of the former Saudi Oil Minister Sheikh Ahmed Zaki Yamani. He saw in 1978 that his counterparts in OPEC were only meeting to discuss prices and short-term issues, rather than long-term challenges (nothing has changed since that time).
Luckily, Yamani was able to convince other OPEC ministers of the need for a long-term plan during an informal meeting in Taif, Saudi Arabia, in May 1978. The committee completed its work in May 1980, and OPEC held a ministerial conference — also in Taif, where I was born — and approved a strategy that would cover the next decade.
The LTS was ready and it was about to be presented at the second summit in Baghdad in November 1980 — but the summit did not take place.
Abdulsamad Al-Awadhi, an OPEC veteran who worked closely with Yamani, said that a series of unfortunate events deterred OPEC from implementing its long-term plan, most notably the Iran-Iraq war, the sharp fall in prices, and the hassle with the quota system. Another issue that hindered the LTS development was the lack of will to implement it and the prevailing mindset of officials who could not think beyond prices.
Turning to OPEC today, planners have managed to identify 10 challenges in the latest update of the LTS, including technological developments and uncertainty over demand for OPEC crude, and therefore uncertainties over investments.
Identifying the challenges is key, but the new LTS may see the same fate as its previous version if there is no implementation of the plan.
OPEC cannot afford to miss the long-term planning train as it did in the early 1980s. It is facing today the same challenges: Low oil prices for longer, abundant supply from outside OPEC, and a fierce push in the industrialized world toward alternative energy and electric vehicles.
What will OPEC do to address these challenges? This is still not clear.
What if OPEC underestimated some of the challenges, like shale oil growth or electric vehicles, or breakthroughs in renewables technology? Can OPEC members afford another lost decade or two like what happened in the 1980s and 1990s? The answer is no because their populations are much larger.
OPEC needs a permanent committee for its LTS. Putting deputy ministers in charge of it (as in the past), or governors (as it stands today) to review it every five years is not enough as the world is developing fast. Long-term planning should be annual as technology develops rapidly. Above all, OPEC countries need a sense of future, resilient economies, and sound institutions to confront the new reality.
As Benjamin Franklin once said: “By failing to prepare, you are preparing to fail.”
:: Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
:: Disclaimer: Views expressed by writers in the Column section are their own and do not reflect RiyadhVision’s point-of-view.