Worst OPEC Meeting Ever: Everyone Loses – Analysis

ROBIN MILLS | JUNE 2011 | SOURCE: Eurasia Review

OPEC’s gathering in Vienna last week ended in “one of the worst meetings we have ever had,” according to Saudi oil minister Ali Al Naimi.

This meeting simply demonstrated what has been evident ever since the 1970s – that OPEC acts effectively only in a crisis.

When times are comfortable, or when a tight market badly needs more oil, OPEC is ineffective due to the basic divergence in interest between its members.

Worst OPEC Meeting Ever: Everyone Loses – Analysis

The opponents of a production rise simply played a weak hand badly. Had they accepted the clear evidence of need for higher output, they might have been able to reach a reasonable compromise with the Saudis.

Now Saudi Arabia, and its Gulf allies Kuwait, Qatar and the UAE, will simply go ahead and increase oil production, since they are the only OPEC members able to do so.

Iraq's oil production is something of a special case, since it is the only OPEC member executing large expansion projects.

The comment by Iraqi oil minister Abdul Karim Luaibi on the sidelines of the Vienna meeting, that the Iraqi oil production target would be cut from 13 million bpd to 7-8 million bpd, makes no difference: No analyst thought the higher target was feasible anyway.

Setting a more realistic target is, if anything, encouraging for progress.

So the spotlight is really on Iran and Venezuela. Through mismanagement, hostility to foreign investment and (in Iran’s case) sanctions, both have failed to make the most of their vast hydrocarbon endowment, even as their budgets become ever more dependent on oil revenues.

Venezuela has recently made some progress on signing deals to develop its enormous Orinoco extra-heavy oil deposits, now estimated by the U.S. Geological Survey to hold 513 billion barrels of potentially recoverable oil, almost twice Saudi Arabia’s total.

But given the history of nationalization and tax rises imposed on foreign oil companies, and the mixed bag of investors selected for Orinoco, including Iran, Belarus and Russia, countries without the necessary technical skills or, in some cases, financing for such projects, rapid progress seems unlikely.

Heavy spending on social programs, the decimation of state oil company PDVSA’s cadres since the 2002 anti-Chávez strike, power cuts, food shortages, high inflation and the flight of the middle class, means Caracas needs $110 per barrel to break-even, as estimated by Credit Suisse.

Iran is thought to need $100 per bbl to balance its budget, given a dismally-managed economy with inflation around 20 percent and unemployment unofficially put at more than 17 percent. Its oil production is slowly declining, although this may be partly offset by reduced domestic consumption following last year’s subsidy reform.

So, the Saudis and their Gulf allies need to meet the challenge of Iraq, to be able to pressure Iran if required, and to threaten other recalcitrant OPEC members.

Some observers, following the lead of the late Houston investment banker Matthew Simmons, believe, with a distinct lack of evidence and logic, that Saudi oil reserves are overstated and its fields in trouble.

Riyadh has still not been transparent enough with data to convince them otherwise, and this scepticism has been a major factor in shifting long-term price expectations upwards since 2004.

And the Saudis’ own budgetary room for manoeuvre is not what it was: Massive state spending to head off discontent has raised their break-even price to $83 per barrel, as estimated by the Centre for Global Energy Studies, founded by former Saudi oil minister Ahmed Zaki Yamani.

The breakdown of the OPEC talks, however predictable, is mildly negative for oil prices. That prices rose only modestly, when the OPEC news coincided with a large U.S. stock draw, demonstrates that markets realize Saudi Arabia does not need permission from Hugo Chávez or Mahmoud Ahmadinejad to boost output.

The OPEC unity of 2009 has evaporated, and its members have returned to a zero-sum struggle, at least until the next crisis arrives.

Related article: Can Saudi Arabia supply the oil market by itself?

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