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OPEC Production Cap: What’s Really Going On?

Posted on Wednesday, October 19, 2016 by Gary Schwendiman
Author Gary Schwendiman Presenting at the International SMR Summit in April 2016

OPEC, or the Organization of Petroleum-Exporting Countries, has been in the news a lot the past couple of weeks. The initial storyline reported in Bloomberg on September 28 outlined an agreement among OPEC members to cap their overall output. The likely outcome of such an agreement would be improved economies for OPEC countries, who would now control a scarcer and still high-demand commodity; improved market share for non-OPEC oil-producing entities (like Russia and perhaps US shale oil); and higher gas prices for consumers. But, as always with news stories, there is more to this situation.

Bloomberg’s initial report notes that this agreement within OPEC might contain the kernel of reconciliation between Saudi Arabia, who dominates the cartel, and Iran—the two countries have been at odds of late. The agreement permits Iran not to cap its production. But aside from Iran, it now emerges that three other countries—Iraq, Libya, and Nigeria—also expect not to have to cap production. So, are they capping or aren’t they?

As CNBC’s “boosters and cutters” graph shows, of the fourteen members of OPEC, eight actually increased output last month. The story isn’t over:  the final agreement is supposed to be reached in November. But reading through the basic facts I just recorded clearly shows that now may not be the time to rush out and buy stock in oil (as many people did after the September 28 announcement), and now also may not be the time to rush out and stockpile gasoline. The poorer OPEC countries in particular are eager to keep pumping it out, and the heavier hitters like Saudi Arabia have such a huge output that their seemingly magnanimous decrease may be a drop in the proverbial bucket.

What isn’t being discussed, and what should be being discussed, is the shortsightedness of this situation. As I show in my book, the world’s oil supply is not bottomless. In fact, many countries have long passed their peak production. No matter how abundant oil may seem at this point, and no matter how resistant OPEC members may be to moderating production, eventually it’s going to run out.

Meanwhile, we continue to drive internal-combustion-engine vehicles in ever-greater numbers, and so our demand for fuel continues to rise.

This odd OPEC story should really alert us again to the urgent need to promote sustainable sources of fuel that can be produced at home independently of large, multinational export conglomerates. As it happens, the fact that internal-combustion-engine vehicles are generally fueled by gasoline or diesel is an artifact of history. Back in Henry Ford’s day, they were run successfully on seed oils…and on ethanol.

US corn production is now up to around 500 bushels per acre in some places, which only improves its sustainability. And ethanol production from corn is clean and efficient. Ethanol itself is such a clean-burning fuel that NASCAR and Indie 500 drivers prefer it.

The more we look toward ethanol, the less we need to be concerned about whether or not there is consensus within OPEC, and whether or not they will do what they say they will do.


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