Oil: the writing is finally on the wall

Eat your hearts out, Pablo Escobar, Joaquín ‘El Chapo’ Guzman and Nemesio ‘El Mencho’ Oseguera Cervantes. The richest cartel by far is still the Organisation of Petroleum Exporting Countries (Opec), and its leaders also get to die in bed. But one of its oldest members, the United Arab Emirates (UAE), has just quit. No notice, no explanations – just quit.

The UAE is the cartel’s third biggest producer, so this is going to have several major consequences. The first, which will happen as soon as the Strait of Hormuz is reopened, is that the price of oil will drop, possibly even below the pre-war price. (Brent oil was selling for about $65 a barrel one year ago; this week it reached $119).

The whole purpose of a cartel is to keep the price of the product high by restricting the supply. That requires discipline by the producers, because some producers will benefit more than others if they succeed in keeping the prices high. (The oil is sold to everyone at the same price, but the cost of producing a barrel of oil varies widely among the Opec members.)

So there has always been a process of negotiating production quotas inside Opec, and the UAE usually wanted a higher quota than the cartel’s biggest producer and de facto leader, Saudi Arabia. It wasn’t just greed, though. The two countries have a profound disagreement about when the remaining oil will become unsaleable: a ‘stranded asset’.

All the CEOs and CFOs in the big oil companies know that fossil fuels will eventually have to be abandoned because of their catastrophic effect on global warming. They have known it since the 1960s because their own scientists told them so. They are not true ‘denialists’, who actually believe what they are saying. They are just liars.

Their strategy for 50 years now has been to keep the show on the road at least until they have had time to make their pile and retire. At least ten generations of senior oil execs have made their piles since then. They spread doubt and confusion, bribed and smeared, and probably slowed the process of ending fossil fuel use by several decades. But all good things must end.

We are definitely entering the period of ‘end strategies’ now, and the dispute between the UAE and Saudi Arabia is precisely about that. The real numbers are secret, of course, but let me pluck some plausible ones out of the air: Saudi Arabia thinks oil demand may hold up for another 20 years, only gradually declining; the UAE believes it will collapse in 10.

If you think like the Saudis, then you want to squeeze as much oil out the ground as possible, stringing the decline out over a couple of decades by keeping the price low and demand high. If you are the UAE, you want to sell as much oil as possible while it’s still worth anything, and to hell with quotas, cartels and the long term. The long term for oil is already over.

This split between the Saudis and the UAE has been visible for some time, but Trump’s war on Iran has put it into overdrive. New investment in energy was already moving out of fossil fuels and into renewables and nuclear on grounds of cost, and the sheer uncertainty of oil supply will accelerate the shift.

Last year there were 2.2 trillion US dollars invested worldwide in renewable and nuclear energy versus just 1.1 trillion dollars into coal, oil and gas. By the end of this year the ratio will probably be three-to-one. So what’s a poor little oil-rich state like the UAE to do? Sell out cheap while they’re still buying at all.

That’s why the oil price will probably drop fast once there is a viable deal on the Strait of Hormuz, unlike the very slow decline that usually follows a rapid rise caused by war. This has some downsides, of course: Very cheap oil means a lot more of it will be burned over the next few years, and it might even save Donald Trump from defeat in the US midterm elections.

Former Saudi Oil Minister Sheikh Ahmed Zaki Yamani, who also served in Opec, once said: “The Stone Age did not end because the world ran out of stones. The Oil Age will not end because the world runs out of oil.”

Correct. It is ending because the real cost of using oil and other fossil fuels – runaway climate change and war – is getting too great to bear, and other, cheaper energy sources are available. I would like to believe it’s also because we are collectively getting a bit wiser, but I’ll take the win anyway.