OPEC and Oil Price Trends

Dr. Walid Khadduri: OPEC and Oil Price Trends

  • 14 June 2011

The beginning of the second half of 2011 has ushered in a delicate stage with regard to developments in oil prices; due to differences that have appeared—for the first time in almost a decade—among member states of the Organization of Petroleum Exporting Countries (OPEC) over price and production levels. These differences emerged in the OPEC’s last ministerial meeting on June 8, 2011, wherein ministers from its member states failed to issue a joint statement—a rare instance in the history of the organization. As is usual in such cases, the causes behind the differences vary from one member state to another. We will try to summarize here the various factors responsible for the differences among OPEC members, and then proceed to examine the impact of possible price developments on both producers and consumers.

The public disagreements between OPEC member countries at the meeting were primarily focused on the prospect of global demand for crude oil in the second half of this year. There were differences on whether the demand would rise to more than 30 million barrels per day (bpd)—as expected by the OPEC Secretariat—or would it stagger to a much lower level. Saudi Arabia, the United Arab Emirates and Kuwait supported figures and forecasts made by the Secretariat that called for raising production by almost 1.5 million bpd to the actual production level that last April stood at about 28.8 million bpd, in order to strike some sort of balance between supply and demand in the market. Meanwhile, countries such as Algeria, Angola and Ecuador opposed this proposal, and said that although demand may rise in coming months, it would not reach such high levels, and that industrialized countries have enough stocks to compensate for any sudden shortage if OPEC spare capacity fails to fill in the gap.

Iran and Venezuela also opposed the proposal of increasing the production ceiling. It is not yet known, however, whether their objections were based on purely political grounds, or for other reasons. There are concerns that this opposition within the OPEC might turn into a political axis that could weaken the policy of consensus which has guided the organization’s work for over a decade. This trend would become clearer in future meetings. If it persists, it could endanger OPEC’s unity, strength and future success in the implementation of credible collective policies.

Finally, the participation of six new ministers in the meeting caused difficulties in holding successful talks and consultations ahead of, and during, the ministerial meeting, as some former ministers were replaced by new ones just days before the date of the meeting. Additionally, Iran’s periodic presidency of the meeting by a minister who assumed office of the Ministry of Oil just a few days ago—which was clear from his lack of adequate knowledge of the way the organization functions and the importance it accords to reaching unanimous decisions—also contributed to the meeting’s failure in reaching an agreement.

The differences exposed by OPEC’s June 8 meeting is expected to affect markets for a relatively long period. Speculation in oil market is also expected to increase thus leading to greater price volatility. The result of differences among OPEC members, as well as the likely boost to speculation caused by such differences, is expected to push oil prices higher, which in turn could even exacerbate the volatile political situation in the Middle East. There could be a possible shortfall in production in more than one country in the region, as is the case today with Libyan oil production (before the revolution Libyan oil production was approximately 1.7 million bpd, and exports were about 1.3 million bpd) and Yemeni production (until mid-March oil production reached about 300,000 bpd, almost a third of which was used for domestic consumption). Despite the low volume of its oil production, the importance of Yemen for oil markets lies in its strategic location, as instability in the country is raising fears of greater and wider spread of piracy by Yemeni gangs in the Indian Ocean. The threat of piracy emanating from Yemen could add new obstacles to navigation through the Strait of Bab Al-Mandeb or lead to rise in the influence of Al-Qaeda to neighboring states in the Arab Gulf, in case of a substantial breakdown in the political and security situation of that country.

For their part, Saudi Arabia, the UAE and Kuwait have pledged to use their spare capacity to prevent any prospective shortage in supplies. In fact, they have already been making up for the present shortfall in Libyan oil production. However, prolonged support for any interrupted supply would only lower the amount of spare capacity available. In other words, the more the spare capacity is exhausted, the greater uncertainty it would engender in oil consuming markets. Even the raising of questions over strains on oil supplies could lead to increased speculation in the market.

The impact of these developments on consumers could be telling. Unsettled markets usually cause prices to rise, and this might impact people from developing economies at a time when they are already burdened by high fuel prices. In addition, there is danger that high import bills for crude oil and other petroleum products could skew the budgets of several developing countries, which are still struggling to mitigate the effects of the global financial crisis. The problem could be compounded by falling oil reserves around the world, which the White House and the International Energy Agency (IEA) have now started warning about publicly. In fact, for the first time data shows that global oil supply seems to be peaking, which could potentially have serious implications for the global economy and for international political stability.

Following the failure of the OPEC meeting, the IEA issued a statement on June 8 that summarized its stance as well as the positions of its Western industrialized members. The statement read: “We have noted with disappointment that OPEC members today were unable to agree on the need to make more oil available to the market. Of course what really matters is actual supply, which should move in line with seasonally rising demand, and we urge key producers to respond accordingly. Ongoing supply disruptions, as well as the fragile state of global economy, call for a prompt increase in supply on a competitive basis that will allow refiners to boost throughputs and meet rising seasonal demand. Otherwise, a further tightening in the market and potential increases in prices risk undermining economic recovery, which is in the interests of neither producers nor consumers.” The following day (on June 9), a White House spokesman said that OPEC’s crude supply is disproportionate to the global demand and that the United States had held talks with oil producing countries on this matter. Meanwhile, US President Barack Obama also announced that he is considering available alternatives, including the use of strategic oil reserves available to the US to counter any rise in prices.

As regards oil producing countries, the implications of these developments may be positive in the short term, as the likelihood of high oil prices is indicative of increased revenues. However, OPEC might have to pay a heavy price should differences among its member states persist. After the Fukushima nuclear disaster and doubts raised over the safety of nuclear facilities (with Japan, Germany and Switzerland deciding against building new nuclear plants) the world has started to become more dependent on hydrocarbons (oil and gas). However, differences among OPEC members at this critical time have again raised questions on the credibility of the organization. In fact, this time the question of OPEC’s credibility is not over its ability to implement its decisions, as has been the case earlier, but its ability to effectively meet increasing global demand for energy.

These are some of the important issues OPEC member states need to deal with, in case the current crisis persists.