Why I hate OPEC and its grip should be loosened

“I hate monopolies, it doesn’t matter who you are,” Methanex New Zealand chief executive Harvey Weake clarifies to his University of Auckland Business School audience.

“The government monopolies are the worst of all, and governments which band together to form a monopoly – that’s got to be the worst of the lot.”

Armed with a few graphs and a laser pointer, Methanex New Zealand chief executive Harvey Weake takes on the powerful oil giant, the Organisation of the Petroleum Exporting Countries, a 12-member body.

Mr Weake’s theme at the “Energy matters” lecture series is “Energy supply: geopolitics or geology?”

He leaves listeners in no doubt about which “g” he thinks matters more.

Monopoly at work
In eight short years, he summarises, oil and coal prices have leaped by about 250%, while conventional global oil supply has remained relatively steady.

China’s coal consumption, meanwhile, has skyrocketed – leading some commentators to wheel out the old adage about Australia’s wealth depending on how quickly our neighbour can dig itself up and send the material to China.

Mr Weake says analysts missed the global financial crisis but also, and more importantly, the shale gas revolution in the United States, prompting talk America could be self-sufficient for energy by 2020 – which is causing headaches for OPEC.

Another slide in Mr Weake’s arsenal suggests fossil fuel scarcity is not a factor – there’s enough oil, coal and natural gas reservers to last decades.

So what’s driving the price surge?

“This is all about OPEC,” he says. “OPEC is the Organisation of Petroleum Exporting Countries; it’s the biggest monopoly cartel in the world.

“If it was companies doing what OPEC does we’d be in jail.

“You’re not allowed to do what they do – if it’s private enterprise – but because they’re sovereign states this represents the biggest cartel in the world.”

Warming to his theme, he says OPEC’s monopoly power gives rise to conflict and behind the scenes power plays.

Stable markets, steady returns
Strangely, that’s not what OPEC says. Its website says its mission is to ensure stable oil markets to ensure regular petroleum supply, a steady income to producers and a fair return on capital for investors.

That sounds innocuous enough.

Founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, its membership now includes Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and United Arab Emirates.

Meanwhile, Toronto-listed Methanex is a $C4.2 billion company operating in 15 countries and employing 1000 people. It produces and sells methanol, which is made from natural gas or coal, which is used in a variety of industrial and consumer products, including clothing, drugs, electronic appliances and alternative fuels.

That’s right, alternative fuels. Mr Weake freely admits he has got a vested interest in this battle with the oil barons.

Generally, you don’t see people in business taking swipes unless their star is on the rise – and so it is with Methanex in New Zealand.

Methanex is spending $250 million this year refurbishing and re-starting its Waitara Valley methanol plant, near New Plymouth, boosting annual production capacity to 2.2 million tonnes.

That’s a far cry from 2003, when the Maui gas redetermination could have seen Methanex leave New Zealand altogether.

Mr Weake says back then the New Zealand arm was on its last legs.

“My orders at the time were to have an orderly shutdown in New Zealand, shift the assets offshore and wind everything up. I didn’t quite follow instructions.”

The Motunui facility was shut and Methanex continued production from its smaller Waitara Valley plant, with a capacity of just 500,000 tonnes a year.

With three units now in operation, the New Zealand plants will supply about 5% of the world’s methanol.

OPEC, meanwhile, which supplies about 40% of the world’s oil, is seemingly rattled by the US rise in domestic production.

Holding back
Mr Weake suggests OPEC is playing a long game.

He says the 12 member countries have 78% of oil reserves worldwide and pump out about 30% of global production.

In about 20 years he says OPEC countries will have 90% of the world’s oil reserves.

“Do you think the power of OPEC is going to increase with time or decrease?

“And if you think it’s going to go up, shouldn’t you be doing something about it? And what should governments be doing about it?

“We’re just blindly following along if we think this is OK.”

Another slide flicks up on the screen, showing what proportion of GDP countries spend on food is consumed in the home.

Unsurprisingly, Western countries spend relatively little, proportionately, on food, with US households spending an estimated 6.4%, Australia 10.7% and New Zealand 15%.

The big OPEC countries, meanwhile, spend more: Iran 23.4%, Saudi Arabia 23.7%, Venezuela 28.9% and Nigeria 39.8%. Algeria is one of the highest at 43.7%.

Many of the countries in the upper band, in the Middle East and North Africa, have had popular uprisings collectively remembered as the so-called Arab Spring.

Risks of upheaval
“You can see there are two worlds here,” Mr Weake says.

“You’ve got the world where you’ve got the effects of high energy that impacts food supplies – where the earning capacity of the economies is far more constrained, or lower than, the have and have-not world.

“That’s getting magnified with time. It’s just the way it is.”

What this represents is risk, he says. Where should companies seek to invest, he asks, the low-income or high-income countries?

Methanex has already put its stake in the ground in New Zealand. It is moving two huge plants from Chile to Louisiana in the US to take advantage of the shale gas revolution – a move which will cost $US1.1 billion.

As the price of energy keeps rising how will this play out, Mr Weake asks. What risks are there from further social upheaval?

He says many OPEC country regimes subsidise fuel and food for their young, rapidly-growing populations to enable them to remain in power.

Saudi Arabia’s population will swell by a quarter by 2030, he says, and oil exports will be constrained by a growing need for it domestically.

He predicts Saudi Arabia will need about $300 a barrel for oil – about three times today's price – to maintain its energy and food subsidies. And it might be at the lower end of the spectrum as Venezuela and Iran will need for greater returns.

Mr Weake says New Zealand needs to wean itself off OPEC oil – while noting he has a vested interest in the alternative fuels market – and invest in sustainable public transport systems.

High oil prices are challenging all economies and hair-brained schemes, such as regulating the electricity market, miss the underlying problem, he says.

“You have to figure out how the economy can use less energy to do what it enjoys doing.”

dwilliams@nbr.co.nz