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With Indonesia’s return, OPEC evolves to stay relevant

OPEC's decision to allow a net importer into an organization of exporters is a reflection of a rapidly shifting energy landscape.

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    Saudi Arabian Oil Minister Ali al-Naimi talks to journalists as he arrives at his hotel ahead of an OPEC meeting in Vienna, Austria, June 1, 2015. Naimi said on Monday he expects oil demand to pick up in the second half of 2015 while supply decreases, in a sign that the Saudi strategy of defending market share through lower oil prices was working.
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The Organization of Petroleum Exporting Countries said this week it would readmit a member whose energy balance doesn’t exactly live up to the storied cartel’s name.

In December, Indonesia will rejoin OPEC, the group of 12 of the world’s top oil exporters, despite the fact that the Southeast Asian nation became a net importer of oil over a decade ago, and continues to consume more oil than it produces.  

The apparent contradiction reflects a global oil industry scrambling to adapt to rapidly shifting energy supply and demand. Readmission to OPEC should create valuable ties for Jakarta as it works to sustain a booming population. For OPEC, it’s a concession that the era of centralized, top-down markets may be coming to a close. New supply continues to boom in the West, and demand centers shift to the East as efficient, renewable technologies curb consumption in Europe and the US. It’s why OPEC’s longstanding grip on global oil markets is slowly yielding to US shale producers and emerging energy alternatives.  

“Indonesia has contributed much to OPEC’s history,” OPEC said in a statement released earlier this week. “We welcome its return to the Organization.”

The home of thousands of volcanic islands and sweltering jungles was already a member of OPEC from 1962 until 2009, when it voluntarily suspended its membership after years of rising domestic demand and falling production. Not a lot has changed since then, since Indonesia’s need for refined products ensures that it continues to import more oil than it exports. An OPEC reentry is thus widely seen as a smart move for Southeast Asia’s largest economy, where plans to revamp oil refineries and a rapidly growing population are spurring demand for even more imports, and consequently, more connections to the oil industry.

But many analysts are scratching their heads as to why OPEC members would allow a net importer into an organization of exporters. While some say the move is indicative of the cartel’s desperation to maintain influence in the international oil market, others say the decision demonstrates that OPEC is evolving.

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“The idea of nations that are oil exporters and others that are sheer oil importers is becoming fuzzy,” says Deborah Gordon, Director of the Energy and Climate Program at the Carnegie Endowment for International Peace. “Look at America. Despite the oil boom, we remain an oil importer, yet we export a tremendous amount of refined product.”

“Globalization is changing the oil industry,” Ms. Gordon adds. “OPEC is in the center of this paradigm shift.”

Saudi Arabia, one of OPEC’s main heavyweights, could be preparing for a future when it too will export less oil and import more refined products, Gordon says. Allowing a net importer to join the gang could be a good way to innovate and renew OPEC’s mission.

To be sure, control over the international oil market is still a desirable consequence of Indonesia’s reentry into OPEC. Many experts point out that Saudi Arabia has a lot to gain from obtaining a foothold in Asia. Regional stability in Asia, where the cartel could benefit from a growing demand for refined products, is important for the organization in the long run. Consequently, it is in OPEC’s interest to promote economic stability in the area and to incorporate Indonesia, which despite being a net importer, is still an important player in the global oil market.

“Indonesia is OPEC’s only member in Asia, and Jakarta’s return extends OPEC’s global coverage,” says Brenda Shaffer, a specialist on energy and foreign policy at Georgetown University, in an e-mail to the Monitor. Indonesia also straddles the Malacca Strait, a major global oil transit waterway that is likely to see increased traffic as Asian energy demand grows. Indonesia’s readmission gives OPEC more control over the transport of oil from core producers to core consumers, Ms. Shaffer notes.

Meanwhile, Indonesia’s motivations are clear. Many analysts have pointed out that the country needs OPEC to capitalize on its oil resources during a time of low crude prices. Indonesia produced around 840,000 barrels of oil per day in July, according to the International Energy Agency. Its re-entry will bring OPEC’s membership up to thirteen, and is expected to boost the organization’s production by around 2.6 percent.

Some analysts suggest that expanding Indonesia’s output on an already oversupplied market could further erode oil prices, a fact that would be undesirable for the cartel’s oil-rich economies.

OPEC is already producing around 2 million barrels per day over its official target of 30 million bpd. Based on July’s outputs, Indonesia’s addition could nudge OPEC’s outputs up to 33 million bpd.

Still, swinging the doors back open for Indonesia could be a way for the organization to signal to the global marketplace that, despite low oil prices, its members are ready to do business

“A larger OPEC may ultimately be a stronger OPEC,” Gordon says.

“Permitting membership to anyone at this point who wants to be part of the cartel creates optimism whereas drawing the circle tightly around current members could signal loss of confidence.”

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