Why OPEC+ may welcome the Biden administration
By most accounts, OPEC, the global oil exporting cartel and their allies led by Russia — known as OPEC Plus — should be wary of the incoming U.S. administration’s rhetoric. President-elect Biden campaigned on an historically pro-environment agenda: He intends to rejoin the UNFCCC Paris Agreement on climate change, achieve a carbon-neutral economy by 2050, and invest trillions into a ‘clean energy revolution’ that will transition America towards green electrification. This adds yet more obstacles for an organization that once viewed the United States — the world’s number one crude consumer — as its prized export market.
OPEC’s market share in the U.S. has been on the decline since the start of America’s “shale gale” in 2010. Strong domestic production, the proliferation of electric vehicles, and now the COVID-19 pandemic, have all lowered demand for foreign oil. We can fully expect the 1.64 million barrels per day that the United States imported from OPEC in 2019 (22 percent of U.S. oil imports) to continue trending downward under a Biden presidency.
Biden is also a vocal supporter of rejoining the Iran deal (JCPOA), which could mean flooding the market with millions of barrels of previously idled Iranian oil production — much to the chagrin of eternal rival and de facto OPEC leader Saudi Arabia.
Together this is more bad news for an organization that has seen global oil demand plummet in the wake of the COVID-19 crisis. Worldwide consumption in 2020 was 8 percent (9.5 million bpd) lower than 2019, leaving markets oversupplied. At the end of 2019, the Brent crude price was $70 per barrel but today hovers around an anemic $45. This is still substantially higher than $18 in April, when WTI future prices actually went negative. In its most optimistic scenario the International Energy Agency (EIA) does not foresee the oil market recovering to pre-crises levels until 2023 thanks to overflowing global inventories and a flattening oil demand curve in the OECD.
OPEC+ responded to the downturn by agreeing in May to an unprecedented 9.7 million bpd production cut through 2020, which has kept a floor on prices and prevented mass oil-field shutdowns across the industry. Crude markets reacted somewhat positively to recent news that the group may extend supply curbs through early 2021, but even this announcement — buoyed by promising vaccine trials — have not been sufficient to lift oil prices from the doldrums.
So amidst this dreary outlook, why are OPEC Plus members — from Saudi Arabia to Kazakhstan — welcoming America’s fiercest environmental champion since Teddy Roosevelt?
First, it is the declining competition. The United States is the world’s leading oil producer and growing petroleum exporter, and therefore a challenger to OPEC. Policies that curtail U.S. oil production — such as the proposed prohibition of drilling on federal land — will reduce global supply, increase OPEC’s global market share, and create an upward price pressure. By some estimates, U.S. oil production could decline between 1 and 3 million bpd before the end of Biden’s first term. This does not include the effects of the president-elect’s pledge to wind down billions in subsidies for the oil and gas sector. A less competitive American fossil fuel industry is music to OPEC’s ears.
Beyond the domestic, OPEC is looking forward to Biden’s foreign policy which could see trade relations improved with China. The removal of Trump-era trade barriers between the world’s two largest economies would promote global growth and thus energy demand — particularly for oil. According to UAE energy minister Suhail al-Mazrouei, Trump’s departure will mean a less hawkish American approach to trade:
“Any ease in the tension between the United States and China with regards to the trade would promote oil demand and would promote further growth in China,” Mazrouei said. “That would lead to more prosperity when it comes to international trade.”
Beyond reduced competition from the United States, a Biden presidency will also inspire some of OPEC Plus’s more forward-looking members to embrace economic diversification and accelerate their own energy transition. Higher oil prices mean more government revenue for investment in low-carbon energy sources.
OPEC leader Saudi Arabia has recast green energy development as a national interest, aiming to generate 30 GW from renewables by 2025 and 60 GW by 2030. The kingdom is committing some $25 billion through 2025 for wind, solar, and hydrogen energy projects. This will all be coordinated through the Kingdom’s National Renewable Energy Program, which has already achieved the world’s lowest LCOE for onshore wind at 1.99 cents per KWH.
Kazakhstan, a Paris Climate signatory and OPEC+ member, is another nation taking a page out of Biden’s energy transition book. Revenues from the fossil-fuel dependent economy are now being reinvested into human capital, green energy initiatives, and Central Asia’s first financial hub, the Astana International Financial Center (AIFC). Using AIFC as a green funding vehicle, Kazakhstan is driving towards 50 percent renewable energy generation by 2050.
The country’s vast and windy steppe and high solar irradiation makes it ideal for wind and solar. Green bonds promoted by multilateral investment institutions like the World Bank, will be issued by the AIFC Exchange and play a key role in catalyzing Central Asia’s sustainable growth. Kazakhstan invested over $1.1 billion in new renewable projects this year and with 1.26 GWs of wind and solar already online.
A climate conscious U.S. president will not be an enemy to OPEC+. On the contrary, this could mean more revenue for these oil producers and in some cases closer diplomatic and trade ties with the new administration, particularly among those members who are making substantive commitments to their own green energy transitions.
James Grant is a Research Fellow with the International Tax and Investment Center in Washington, D.C.