Will OPEC diminish with the global shift to alternative energy and decline in oil demand?

OPEC faces major challenges during the next two decades, with the acceleration of the global energy transition and the reduced dominance of oil in the transportation sector due to the emergence of other alternatives, including electric cars and hydrogen, which will disrupt the oil market.

According to the American Stratfor website, previous expectations regarding the decline in OPEC's status were not accurate, as the cartel, an alliance or bloc, of oil producers has managed to withstand a number of crises since its establishment in 1960.

Among the crises faced by OPEC, the oil embargo in the 1970s, the Iranian revolution in 1979, the Iran-Iraq war in the 1980s, the Iraqi invasion of Kuwait in 1990, the US invasion of Iraq in 2003, and the emergence of US shale oil in the 21st century.

But the circumstances this time are different, as none of the previous crises have brought about a fundamental transformation in the energy sector that leads to an end to the uniqueness of oil in dominating the transport sector, and this fact has prompted the heavyweight countries in OPEC to openly question the future of the cartel and the benefits of membership in it.

Last December, leaks revealed the intention of the United Arab Emirates to reconsider its membership in OPEC and study the implications of the policy of curbing production, and the UAE aims to raise its production capacity to 5 million barrels per day by 2030, which is 93% higher than its current quota. Specified by OPEC.

In 2019, Qatar withdrew from OPEC due to political differences with the member states of the Gulf Cooperation Council, and focused on expanding its LNG exports in the coming years.

The importance that oil has gained in the global market is due to its unique features that made it a necessity in the energy sector, but this dominance will fade significantly in light of the competitive advantage enjoyed by electric vehicles in terms of cost and the adoption by governments of tougher policies to limit the manufacture of diesel vehicles And gasoline.

The high energy density and the relative ease of transporting oil made it almost completely monopolize the transport sector by 90% in 2018, while the remaining energy alternatives currently available have several deficiencies, but this situation seems to be changing.

The relative ease of transporting oil made it almost completely monopolize the transport sector by 90% in 2018 (Shutterstock)

Stable demand for oil

According to British Petroleum, the demand for oil has reached its peak, and even the most optimistic forecasts show that demand for oil may reach its peak by 2030, and the "Covid-19" crisis has accelerated this pace.

For its part, OPEC officially acknowledges that oil demand will stabilize by 2040, but this position reflects the political influence exercised by oil-producing countries.

The site indicated that the stage of stabilizing oil demand would mask the shifts taking place in OPEC member states, which are likely to push the cartel to reduce the focus on supporting markets, and OPEC leaders who have long sought to prevent a price collapse, such as Saudi Arabia and the UAE - are increasingly fighting. With non-OPEC oil producers such as Russia and the United States gaining their market share.

As alternative fuels have become more cost-competitive in the transport sector, OPEC member states have less incentive to prevent the collapse of oil prices and support alternatives in the long term, and OPEC is unlikely to disappear anytime soon due to the regulatory and technical benefits enjoyed by countries. Its members, but by the middle of the third decade of this century - if not earlier - its importance as an actor in market regulation will have decreased dramatically.

Withstand and curb production

The site confirmed that the UAE is not the only OPEC member that openly questions the policy of curbing production, as other member states of the Gulf Cooperation Council, such as Saudi Arabia and Kuwait, have worked to increase oil production.

The site also indicated that the UAE and Kuwait are in a good position to withstand the coming crisis thanks to the huge oil revenues accumulated in the sovereign wealth funds, while the poorer countries in OPEC such as Iraq, Algeria, Angola and Nigeria will face financial crises in the future.

It is expected that the political weight of oil-producing countries will diminish in the future, with the decline of the position of OPEC at the global level and the loss of friendly relations with oil-producing countries due to their importance.

Indeed, there is no relationship based on common interests in the stability of the oil market and supplies as important as the Saudi-American relationship.

It is expected that this relationship will witness a radical transformation with the loss of oil its importance as a main focus of US foreign policy. On the other hand, security and confronting Chinese, Russian and Iranian influence and the human rights record will remain among the main focuses of the US interest in the Middle East.

The decline in OPEC's influence is expected to have repercussions on the oil market. When prices fell, OPEC was working to increase or decrease production to ensure price stability, and try to compensate for the decrease in production during conflicts, in order to create a stable price environment in general.

But OPEC's success in doing so slowly declined over time, with the market reaching the saturation stage with the emergence of other oil producers, but as the response to Covid-19 and the collapse of oil prices in 2014 showed, OPEC can still organize a major response in any crisis, which will become more difficult. In the future.