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Summary
The United Arab Emirates' exit from Organization of the Petroleum Exporting Countries could mean it gets to raise oil production and pump more of it through its Fujairah pipeline that bypasses Hormuz. Both could serve India’s energy interests.
Crude oil, the undistilled kind right out of the ground, was known to the Mesopotamians, Persians and Babylonians. The Chinese were the first to dig shallow wells and transport flammable oil through bamboo pipelines. Canadian geologist Abraham Gesner was the pioneer who began to distil oil and coined the term ‘kerosene’ in the mid-1850s.
John D. Rockefeller’s Standard Oil, founded in 1870, integrated production, transport, refining and marketing of crude oil and its distillates until its anti-trust related breakup in 1911.
Meanwhile, the action was heating up in West Asia; Masjed-e-Soleyman in Iran emerged as the first oil well in the country, discovered in 1908. While mature, it is still an active well, located not too far from the city of Isfahan.
Massive logistics operations during the two World Wars necessitated a bulk shift in fuel from coal to diesel and petrol, adding further impetus to the rapid acceptance of energy sourced from crude oil.
For the first four decades of the 20th century, oil production was dominated by the US, with Russia a minor player. The action then shifted almost completely to West Asia for about three decades after World War II. Thereafter, there has been a balance between production by the US, Russia and West Asia.
After World War II, a wave of nationalization took place. Many countries in West Asia took back ownership of the production of crude oil from Western owners of oil facilities. British Petroleum (BP), Royal Dutch Shell, Exxon, Mobil, Chevron, Texaco and Gulf Oil, ‘the seven sisters’ as they were known, ceded ownership to national oil companies like Aramco, National Iranian Oil and Iraq National Oil.
Later, Abu Dhabi National Oil Company (ADNOC) took over shares of a consortium made up of some members of the seven sisters.
A shift in West Asia’s oil-facility ownership resulted in the creation of Organization of the Petroleum Exporting Countries (Opec). It was born in 1960 to five parents: Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. Several countries joined thereafter, including Qatar (1961) and the United Arab Emirates (1967).
Several that joined have also left since, such as Indonesia, Angola and Qatar. The group’s principal goal was to coordinate output among producers to balance supply with demand at a price that would ensure an adequate return on capital for members.
This is a polite description of a cartel that seeks to influence the global price of a commodity by managing its supply, done through a system of output quotas for member countries.
The US disrupted the oil market early in the 21st century by commercially exploiting a new technique of horizontal drilling and hydraulic fracturing (fracking) to extract oil from fields of shale sediments.
As a result, in the last decade or so, it has re-emerged as the largest producer of crude oil in the world, pumping out over 13 million barrels per day, followed by Saudi Arabia, which produces a quota-adjusted 10 million barrels a day.
As US production began to eat away at Opec market share and influence, the group signed an agreement with some 10 other countries, the largest being Russia, to create Opec-plus.
Beyond the US, Opec and Opec+, Canada, Norway and Mexico are net exporters. China produces a little under 5 million daily barrels and consumes about 16 million, while India produces under a million and consumes about 5 million. Global consumption has topped pre-covid highs and is now about 103 million daily barrels
Three countries—Indonesia, Angola and the UAE—have quit Opec due to quota restrictions. The UAE chose to leave recently, signalling both a need to produce more oil as well as a political fissure with Saudi Arabia over the current Iran war.
This decision, which at first glance seems sudden, has been in the making for several years. With oil demand over the last 10 years growing only 1% compounded per annum, the UAE wishes to monetize its resources today and use the proceeds to transform its economy away from oil dependency.
While the UAE is only the fourth-largest producer within Opec-plus, it is the second-largest producer with excess capacity. In economist speak, this means that an Opec quota keeps its output below what it could be, making it forgo much-needed revenue.
The UAE has also been disappointed that it has not had much regional support to defend itself during the recent conflict in Iran. This opens a strategic window for further alignment, particularly with the US. And sure enough, the UAE immediately requested a currency swap line from the US to backstop its need for dollar liquidity amid an economic crisis arising from the Gulf conflict.
The UAE’s move to quit Opec is good news for India. Almost immediately, India’s national security advisor made a trip to Abu Dhabi. Increased UAE oil production could help keep a lid on oil prices.
Strategically, the UAE can transport some of its oil via a pipeline to Fujairah, which has the advantage of being located on the Gulf of Oman; so this route bypasses the Strait of Hormuz. India is one of the closest oil-importing countries to Fujairah and it must press home this advantage to secure new long-term contracts for crude oil.
P.S: “Cartels have spread and will spread as long as the world lacks an effective mechanism by which balanced expansion may be achieved without a resulting disruption of prices,” said legendary investor Benjamin Graham.
The author is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand.
About the Author
Narayan Ramachandran
Narayan Ramachandran has been a Mint contributor for 16 years and writes a fortnightly column called “A Visible Hand”. He spent over three decades on Wall Street, most of it with Morgan Stanley. Narayan was the country head of Morgan Stanley India, leading all of the Group's businesses. Prior to that, he was the head and lead portfolio manager of Morgan Stanley’s Global Emerging Markets and Global Asset Allocation teams, managing over $25 billion in assets. He began his career at Goldman Sachs.<br><br>Narayan is Chairman of TeamLease Services, as well as Unitus Group, India's largest social enterprise bank. Narayan is also Chairman of Vivriti Next and UC Inclusive Credit, which are pioneering firms working on bringing credit to underserved markets.<br><br>In the 2010s, Narayan finished a full eight-year term as Chairman of RBL Bank, one of India's fastest growing banks. He serves as the Chairman and co-founder of InKlude Labs, a social business enterprise working in the field of education and public health. Through InKlude Labs, Narayan works with deserving enterprises to help them scale. He is currently working on incubating the Center for Wildlife Studies and Asan Cup, a feminine hygiene start-up.<br><br>He served as General Partner and Member of the Global Strategy Advisory Board of L Catterton Asia, a consumer-focused growth equity firm. He is an active private equity investor in financial services, technology, social enterprises and consumer businesses. He is co-founder and Fellow at the Takshashila Institution, a public policy school and think-tank. He teaches an online graduate-level course on contemporary economics.<br><br>Narayan received a BTech in chemical engineering from the Indian Institute of Technology Bombay and an MBA from the University of Michigan. Narayan holds the Chartered Financial Analyst designation.
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