The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff"

Helima Croft, RBC Capital Markets

Algeria's former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country's Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. "Why remain in an organisation that no longer serves any purpose?" he asked.

Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna," said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets.

The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. "It would fuel discontent in the Kingdom and play to the sense that they don't know what they are doing," she said.

David Fuller's view

Here is a PDF of AE-P's column.

For decades commencing in the 1070s we have lived through an era where OPEC controlled global energy prices, due to their enormous reserves of easily accessible crude oil.  In this dominant role, OPEC rulers in the Middle East and North Africa grew very rich, presiding over superficially stable countries, controlled by subjective interpretations of Islamic law, enforced by their authoritarian national regimes, and enormous government handouts to their citizens in an effort to buy loyalty.   

For over two thousand years there have been many similar regimes, albeit with different state religions.  Some of these ruled for centuries before mostly decaying from within.  Others became complacent and could not react to change with the pace of their rivals. 

OPEC countries of the Middle East and North Africa were more often religious rivals rather than allies, but maintained associations of mutual convenience due to their dominant role as the leading suppliers of crude oil.  However, in the last several years the long-held myth of dwindling oil supplies trading at ever-rising prices has been shattered by the march of technology, undermining OPEC’s grip on the oil market from both ends of the spectrum.  

The steady development of initially heavily subsidised renewable energy sources, often in response to climate change concerns, can only increase their competitiveness.  Today, solar power has almost unlimited potential in terms of both supply and the variety of instillations to capture and increasingly store the sun’s energy. 

Additionally, new nuclear energy has the potential to be safer, cheaper and more flexible than ever before. 

As for crude oil and natural gas, technological developments now ensure that fossil fuels can be discovered and produced, both conventionally and unconventionally (fracking), probably until at least the end of this century, subject to climate change considerations. 

In conclusion, Saudi Arabia’s attempt to kill off US fracking, along with oil from a few higher-cost conventional producers, can only lead to a temporary Pyrrhic victory, at best.  Even if the US decided to discontinue fracking, which is very unlikely, the same technology is available to other countries.

OPEC’s best fallback position is to persuade as many oil exporters as possible to agree on supply reductions sufficient to stabilise prices in the $70 to $80 region.  That would reduce their current deficits and create a temporary window for diversifying their economies.  It would also be the least painful outcome.