OPEC wins, the West loses

On Tuesday, the Joint Ministerial Monitoring Committee of the cartel of oil exporters, the Organisation of Petroleum Exporting Countries (OPEC) alongside non-OPEC associates like Russia, decided to continue its gradual increase of oil production in the month of July. In what is partly a sign that OPEC+ believes that the global economic recovery is solidly underway, the countries will increase oil production by 441,000 barrels a day in July. If Saudi Arabia rolls back its own voluntary cuts, then an additional 400,000 barrels a day will go on the market. But, even so, this will not be enough to control the spike in crude oil prices; Brent crude is now climbing above $71 a barrel. This is because of a coming supply crunch; estimates by the International Energy Agency suggest that, by December, demand will be above 44 million barrels a day, while supply will be stagnant at 40 million barrels a day.

But there are also deeper structural factors in the oil and gas supply landscape that must be acknowledged. Last Wednesday, it became impossible to ignore the combination of judicial and shareholder activism that is forcing Western oil companies away from expanding capacity. Among other developments, courts in the Netherlands ordered Royal Dutch Shell to cut its carbon emissions much swifter and further than the company had planned — to 45 per cent below 2019 levels by 2030. Other companies may now face similar lawsuits, particularly in Europe. What courts aren’t doing, particularly in the US, might be done by investors instead. At the same time as Dutch judges ruled against Shell, the management of oil major ExxonMobil suffered a major defeat when investors overruled them to appoint board members with links to the climate change movement. And on the same day, 61 per cent of investors in Chevron, a third oil behemoth, voted in favour of a deep emissions cut from the company, overruling its board of directors.

While the court ruling against Shell may lead to immediate action, the ExxonMobil investor revolt is perhaps more impactful. The revolt was instigated by a tiny activism-oriented fund, Engine No 1, which owns just 0.02 per cent of the company. But its action was backed by the United States’ three largest and most influential funds — BlackRock, Vanguard and State Street. Also on board were the three largest US pension funds, including the vastly powerful California State Teachers’© Retirement System. The shareholder revolts reveal that concern among investors about stranded assets in the oil and gas sector have reached a tipping point. It is not questions of law or of climate ethics that concern these giant funds; it is worries about capital loss, risk and transparency. Moody’s now warns that the existing risks for these companies have been augmented by legal and other risks following the events, meaning that they will find it harder to raise capital.

The consequence of these actions is clear. Demand is showing no signs of coming under control, but Western oil companies are being forced towards a low-carbon future. This will increase the power, including pricing and allocation power, of state-run producers like Saudi Aramco or Russia’s Gazprom. A significant geo-economic and geopolitical shift is underway. Upward pressure on fossil fuel energy prices is also likely to persist — which will complicate efforts in India to manage monetary policy alongside fuelling a recovery from the pandemic. The era of pricey oil may be back.


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