Amid the turmoil in the Middle East and North Africa and rising global oil prices, OPEC ministers in Vienna failed to arrive at a consensus about crude production levels.
This was the first time in 20 years that an OPEC meeting failed to produce an agreement. “It was one of the worst meetings we’ve ever had,’’ said Ali al-Naimi, Saudi Arabia’s oil minister. “We were unable to reach an agreement.’’ With oil trading above $100 dollars, Saudi Arabia, Kuwait, the United Arab Emirates and Qatar had lobbied to increase output but were opposed by Venezuela and Iran. The Saudi led proposal was to increase daily oil output by 1.5 million barrels to 30.3 million barrels. Venezuela and Iran fear that by increasing daily output global prices will fall.
Geopolitics was largely responsible for the OPEC ministers’ failure to produce an agreement, specifically, the Iranian-Saudi disagreement over the ongoing turmoil in Bahrain. Bahrain, which is ruled by Sunnis, invited Saudi security forces into the country to help squelch an insurrection. This angered largely Shiite Iran. The fact that Saudi Arabia was unable to persuade the other OPEC ministers surprised some.
Mike Wittner of Societe Generale SA in New York commented, “It’s a bit surprising because the Saudis usually get their way, and the track record since 1998, on balance, has been pretty good.” He continued, “In this particular case, there were very diverse opinions going into the meeting and even looking at the fundamentals, there were different signals.’’ Further limiting global supplies and partly feeding the rise in oil prices is the ongoing unrest in Libya which has resulted in the elimination of roughly 90 percent of that country’s oil output. Pre-revolution, Libya was exporting roughly 1.55 million barrels a day, now down to 200,000 barrels. However, the failure to reach an agreement has some arguing that OPEC’s relevancy is now in question.
“OPEC faces mounting questions about its credibility and relevance after Wednesday’s group meeting broke up in disarray with no decision on raising production—despite widespread fears that higher crude prices were endangering the world economy. The meeting, the first since the start of the Middle East pro-democracy movements known as the Arab Spring, exposed deep divisions between members of the Organization of Petroleum Exporting Countries that some say can’t now be healed,” writes Guy Chazan in The Wall Street Journal.
The fact that OPEC failed to reach an agreement and the fact that some OPEC member countries are exporting oil above their quotas begs the question of the collective enforcement power of this cartel. As certain states game the system and flood the market with more oil the question arises as to the effectiveness of establishing a system where member-states promise to follow pre-arranged quotas. “Everybody in OPEC is cheating and everyone knows that…Don’t listen to what they say, but watch what they do,” observed Fadel Gheit of Oppenheimer & Company.
OPEC’s strength as an organization is that traditionally when global oil prices have risen OPEC has simply agreed to export more oil onto the global market and when prices are too low they limit the amount of oil in the market. “They’ve showed they are only interested in defending the downside,” said David Wech of JBC Energy.
With the 2012 presidential election less than a year and a half away the White House is aware that high gas prices will further hamper the U.S. economic recovery resulting in a very brutal reelection campaign waged largely over Obama’s handling of the economy. As a result, the White House has begun to openly discuss the possibility of tapping into the Strategic Petroleum Reserve.
“My general view has been that the strategic petroleum reserve is to be used when you don’t have just short term fluctuations in the market, but where you have a disruption,” President Obama said to finance writers gathered at the While House. “Libya has taken 125 million barrels off the market. We’re examining broadly what that means in terms of the oil market.”
President Obama has for months pushed back at suggestions that the SPR be tapped to relieve high gas prices. The president appears to acknowledge that the Libyan conflict would constitute a threat to global oil supplies. Further, current oil prices are approaching 2008 levels which facilitated the U.S. and global economic crises juxtaposed with the U.S. housing crises. According to the American Automobile Association, the average price for a gallon of regular gas is $3.73. A year ago it was $2.71.
“We believe that we are in a situation where supply is not meeting demand, and there are a variety of reasons for that, including disruption caused by the situation in Libya, which has removed 1.5 million barrels a day from the market,” said White House spokesman Jay Carney during a recent press briefing. The rare public disagreement in the 12-nation cartel is more symbolic than substantive.
While the Iranian-Saudi disagreement caused OPEC to fail to come to an agreement, many OPEC nations are already exporting more oil than their quotas call for. While Iran would prefer to keep oil prices above $100 dollars it does not have the capacity to export more than it already is.
David Goldwyn, formerly with the State Department commented, “This longstanding Iranian-Saudi competition is now being played out in OPEC.” Mr. Goldwyn continued, “Unfortunately for Iran, and fortunately for the rest of us, it’s Saudi Arabia that has the spare capacity to give. So Iran can grab the headlines, but Saudi Arabia will follow its own judgment.”
However, energy experts are increasingly concerned about unrest spreading to other OPEC member countries that have largely avoided structural unrest. If Saudi Arabia, the world’s largest oil exporter, were to become destabilized, global oil prices would likely rise and stay there over a long period of time.
However, increased oil supply largely depends on Saudi Arabia. OPEC’s inability to come to a consensus is a long-term challenge for the cartel. Goldman Sachs Group’s David Greely suggests, “disconcerting, the fact remains that the vast majority of OPEC spare capacity remains in Saudi Arabia.’’ Adding, “Consequently, it still remains a question of Saudi’s willingness and ability to raise production to keep pace with world oil demand growth.’’
In the end, increased production poses a challenge for Saudi Arabia who already produces a significant amount of oil that flows to the market and its capacity would be stretched if it were to add 1.9 million barrels a day. A solution will inevitably have to be found. JPMorgan Chase & Co is among those forecasting oil reaching $130. High oil prices will severely limit the ability of many nations to emerge from their economic malaise.