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Friday, 25 July 2014

Fraction of the whole

OPEC starting to look like a cartel of one

Twelve nations belong to OPEC but only Saudi Arabia has mattered of late. At the latest meeting in Vienna, the kingdom again batted away Venezuela, Iran and others who wanted to cut output. The deepening divide in the Organization of the Petroleum Exporting Countries could face a more serious test if prices keep sliding.

Many OPEC members now feel the fiscal heat when oil prices drop below $110 a barrel. Both Iran and Iraq, for example, need a higher price to balance government budgets. So it’s small wonder that such producers would have been alarmed by the 25 percent slide in Brent since March to around $97.

The crisis in the euro zone is mainly to blame. Still, many in OPEC resent Saudi Arabia for contributing to the problem by pumping at its highest level in 30 years, at close to 10 million barrels a day. This prodigious output is the main reason OPEC is producing about 5 percent more than the limit it set for itself in December.

Saudi Arabia and its Gulf allies are increasingly ignoring such criticism. Saudi oil minister Ali al-Naimi says its recent bumper production is a “kind of stimulus” for a troubled global economy. And it’s true that giving way to the likes of Venezuela would have delivered an ill-timed blow. The Saudis also seem aware that sky-high oil encourages rival sources of production, such as from oil sands or shale oil. As an added bonus, cheaper crude sustains the pressure on Iran, which vies with the kingdom for influence in the Middle East.

Luckily for oil consumers in rich nations, Saudi Arabia and its allies hold most of the cards within OPEC. No other member has spare production capacity to meet emergencies. Equally, Saudi Arabia has greater financial flexibility to cut back production without causing a crisis for its public finances.

Fiscal strains could make nations like Venezuela reluctant to cut production if prices do continue to slide. Instead, they’re likely to turn to the Saudis to trim output and sacrifice revenue for support. Either way, OPEC is increasingly looking like a cartel of one.

Context News

The Organization of the Petroleum Exporting Countries on June 14 agreed to keep its ceiling for oil production at 30 million barrels a day, the same it did at its last meeting in December.

Oil ministers from the 12-nation club meeting in Vienna did not agree quotas that would limit each country’s production.

Actual output has been higher, at around 31.6 million barrels per day. Saudi Arabia accounts for 10 million barrels per day of the total.

Nations favoring lower output said this excessive pumping threatened to push oil prices sharply lower.

“There is at the moment an unjustified rise in the organisation’s production,” said Algerian Oil Minister Youcef Yousfi ahead of the OPEC meeting. “There is a risk that prices will fall, uncontrolled, to levels from which it will be very difficult subsequently to bring them back.”

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