Opec wins, but so does Indonesia

The American writer Mark Twain once quipped that reports of his death were greatly exaggerated.

The Organisation of Petroleum Exporting Countries (Opec) did the same on Nov 30. It proved that it is alive and kicking when it sent crude oil prices soaring by agreeing to make its first production cut in eight years. Indonesia's suspension from the cartel was a sideshow in that dramatic denouement, but it has implications for this country in terms of both costs and benefits.

The larger picture is that Opec has reclaimed its place as a prime mover of oil markets. This should have been so in any case since the group of major oil producers, numbering more than a dozen, has habitually set the pace in the market. Although it pumps only one-third of the world's crude, its ability to act collectively sets it apart from the other two-thirds. Opec's awesome power was apparent during the 1973 oil crisis, when a spike in prices had economic and political consequences that were felt worldwide.

Since then, Opec has become just another cartel, and one at the mercy of forces beyond and within it. Externally, technological developments like US shale production undermined some of the prominence that Opec enjoyed when oil was the default medium of energy. Also, concerns over the deleterious effects of climate change and the place of fossil fuels in the ecological scheme of things spurred interest in the development of renewable sources of energy.

Internally, conflict in the Middle East affected the three largest Opec producers - Saudi Arabia, Iran and Iraq. Dissonance took a political toll on the organisation's ability to move in a concerted and sustainable way. Then, Opec members broke ranks. Saudi Arabia, the United Arab Emirates and Kuwait may have a tradition of honouring their promises to cut production but some other members do not, particularly when prices fall.

On that trajectory of waning influence, the past two years have been punishing for Opec. One assessment shows it will earn only US$341 billion (S$488 billion) from oil exports this year, down from US$753 billion in 2014, and US$920 billion in 2012.

In this context, the cuts agreed on at the Opec meeting in Vienna mark a point of ascent towards a new trajectory. Reportedly, Opec officials hope that by midnight on the last day of this year, the oil price will be approaching US$60 a barrel - compared with last January, when oil was below US$30 a barrel.

Whether or not this rise occurs and can be sustained, Opec has confounded predictions of its demise by getting most of its members to agree to cut production so as to reverse its decline into the margins of global affairs. Exceptions were made for Libya and Nigeria, but the majority stuck to the deal.

Astonishingly, the Vienna meeting even managed to get Russia, a non-member, to agree to unprecedented cuts in its production. Overall, there was a clear vote of support for Opec's attempt to re-balance the supply-demand equation so that all producers could hope to win in the medium term, at least. Last Saturday, Russia and 10 other non-Opec countries agreed to join Opec in cutting their output - by more than half a million barrels a day (bpd) for six months next year.

Even more surprising, Opec acted in full knowledge of the fact that an immediate winner of the production cuts would be its arch-rival, American shale. However, its main strategy is to prevent oil prices from sliding precipitously. The ultimate effect of that fall would have been volatility and disarray in the market. Chiefly supply-driven, that imbalance would have been counter-productive for producers and consumers.

It would have questioned the fiscal integrity of producing nations and their ability to make viable investment in the oil industry. Imbalance would also have endangered the long-term basis of the energy security which consumers need for even basic economic planning. Ultimately, instability in oil markets erodes the continuity that both sides need. With its latest move, Opec has embarked on drawing down its inventory so as to protect its members, and buyers, from price shocks that benefit no one.

Indonesia's request for suspension from Opec might appear to go against the optimistic logic of the production cuts achieved in Vienna. However, Indonesia is a special case. In spite of being a substantial oil producer, it is also a net importer. This means that higher oil prices, combined with production cuts, would inflate its import bill while undercutting its export revenues.

Still, Jakarta was willing to go along with other Opec members in the spirit of institutional solidarity. But the cut demanded of Indonesia - of about 37,000 bpd, or no less than 5 per cent of its output - was simply too great to accept. There was no way of striking a compromise between that figure and what Indonesia was prepared to concede: a cut of 5,000 bpd. The strain on the country's revenues would have been just too severe.

Certainly, there is a cost to Indonesia breaking ranks with Opec: It will no longer be a party to decisions taken by the organisation. The strength provided by numbers will be absent as Jakarta navigates the international oil market. But the benefit lies in the fact that Indonesia will be free to tailor its exports more closely to the needs of the domestic economy. The oil industry's contribution to state revenue has dropped from around 25 per cent in 2006 to about 3.4 per cent this year, according to one estimate. Even so, oil remains a substantial industry.

Looking ahead, Indonesians need to understand the pressing need for responsible fuel consumption whose pricing reflects market realities. Whether in or out of Opec, the country will have to come to terms with a new period of rising oil prices that could emerge from Opec's historic decision at Vienna.

•Dwi Soetjipto is the president-director and CEO of Pertamina (Persero), an Indonesian state-owned oil and natural gas corporation.

A version of this article appeared in the print edition of The Straits Times on December 13, 2016, with the headline 'Opec wins, but so does Indonesia'. Print Edition | Subscribe