in decades no agreement was reached. Iran led the hawks in defeating the Saudi effort to raise production quotas—a campaign the Islamic Republic has often pursued to defeat in the past.
The world immediately started analyzing what happened and trying to determine who had won.
At the most basic level, the Islamic Republic won. Instead of being an outlier opposed by most other OPEC members, Iran was able to assemble six of OPEC’s 12 members to say no to the Saudis—Angola, Algeria, Ecuador, Libya and Venezuela back Iran. Only the three other Arab states of the Persian Gulf stood with the Saudis. The remaining two OPEC members, Iraq and Nigeria, stayed neutral.
But that overlooks the fact that OPEC is not a very important organization anymore. It has little impact on the market, although that is, after all, the reason it was founded. Often, OPEC has cut output to raise prices—but prices have then headed downward. And sometimes when it has raised output to cut prices, prices have risen. The market is more complex than a half-century ago when OPEC was founded and OPEC is now but a minor player.
Iran itself said speculators like hedge funds have more impact than producers and consumers.
OPEC in theory aims to regulate the market by adjusting output. But 10 of the12 members of OPEC are currently producing over quota—all but Libya, because of its civil war, and Angola, which has normally been an over-producer in the past. Iran constantly argues for low production quotas to keep prices high—but Iran has not produced within its quota for years. Essentially, the Islamic Republic encourages other OPEC members to produce less so it can sell more.
Right now, all the OPEC members outside the Persian Gulf Arab states are producing at or near capacity. A vote to raise quotas would not benefit them. That is logically a reason they signed up with Iran to vote against raising quotas.
Only Saudi Arabia has any large excess capacity. Kuwait, Qatar and the UAE, which backed the Saudis, also have some excess capacity. That may explain why they all supported higher quotas.
But even before OPEC met last week, Saudi Arabia announced that it would raise its output. That in-your-face threat may have offended many of the other members and prompted them to support Iran this time. The Saudi pledge to raise output regardless of what OPEC did amounted to Saudi Arabia telling OPEC it was irrelevant.
But it’s not all a Saudi-Iranian game; there are real issues. The Saudis think prices are too high now and threaten to pull the rug out from under the world economic recovery. Saudi Arabia has always felt it has a role in contributing to world economic stability. The Islamic Republic rarely talks about that, and some think Tehran takes pleasure in seeing the richer parts of the world struggle.
The main industry issue OPEC faces at each meeting is divining what volume of oil the world will need in the coming months. OPEC’s own in-house analytical shop forecast that the world will need 1.7 million barrels a day more than is now being produced in the second half of 2011. Saudi Arabia proposed raising quotas by 1.5 million barrels, a conservative figure if one accepts the OPEC analysis.
The six OPEC states that voted against higher output were effectively repudiating their own analysts. Why? Perhaps they didn’t believe their analysts—though other industry prognosticators have almost uniformly said the market will require more oil in the third and fourth quarters. More likely, however, the six voted no because they don’t have the capacity to pump more.
Saudi Arabia has promised more oil. Every Saudi official who talks to the media seems to be giving a different figure for the increase, however, which suggests the powers-that-be in Saudi Arabia haven’t yet made up their minds. However, according to the latest Platt’s tabulation, Saudi Arabia raised its output even before the OPEC meeting—by 200,000 barrels day in May. A few years ago, Saudi Arabia was one of the few OPEC members adhering to its quota. As of May, Saudi Arabia accounted for 70 percent of the overproduction. Iran accounted for 20 percent.
Politically, the Islamic Republic played the outcome as just one more arrow in its anti-American quiver. Acting Oil Minister Mohammad Aliabadi said the refusal of OPEC to boost output was a defeat for the United States, which sought more oil and lower prices. And, most assuredly, that is what the United States does want. And so do all the other oil consuming countries, which means most of the world, a point Aliabadi ignored.
But Aliabadi apparently didn’t play the anti-American card inside OPEC. He had a logical argument. He said no orders for crude are currently going unfulfilled. So, why not keep quotas the same for now and meet in another three months, when quotas could be raised if demand could not be fulfilled. Others retorted that OPEC should anticipate the market and not just react after the market is churning with instability.
Aliabadi’s address, released by Iran, also argued that prices aren’t rising as much as it appears. He said that the published price rise of the last six months comes to 24 percent. But when one adjusts for inflation and the change in the value of the dollar (in which all oil is priced), then the hike has been a mere 16 percent. In the context of his speech, he dismissed 16 percent as de minimis.
Aliabadi also made an argument that actually classified OPEC as irrelevant. He said speculators were having great impact on oil prices. He said that purchases on the futures market were now 18 times higher than the actual volume of daily traded crude.
In other words, he was saying that hedge funds and other investors who don’t use oil but buy futures now dominate the market and determine prices, not the supply and demand of actual crude itself.
“Excessive speculation in the futures markets increases volatility unrelated to fundamentals and efforts by governing and regulatory bodies in the consuming countries to minimize such speculation remain imperative,” Aliabadi said, effectively begging American regulators to slash prices by driving out speculators.
After the meeting, Aliabadi also said that a unilateral Saudi output boost would not solve America’s demand for more gasoline. He said, correctly, that most of the Saudi shut-in capacity is heavy oil, which is less suitable for gasoline, while much of the market’s lost oil is light crude from Libya, which is ideal for gasoline. He thus assumed that the Americans want more oil only for themselves. He did not consider the possibility that the Americans just want more crude on the market generally for everybody.
The Islamic Republic also tried to sell the outcome of the OPEC session as a sign that Saudi Arabia is no long the great power within OPEC. That may be. But earlier this month, the Saudis announced they were lowering their July prices for light crudes and raising their prices for medium and heavy crudes. On Monday, Iran followed suit. That didn’t exactly indicate that the Saudis are without influence.
When the OPEC meeting ended, Saudi Oil Minister Ali An-Naimi emerged to tell reporters, “We were unable to reach an agreement; this is one of the worst meetings we have ever had.” But why was their no agreement? Normally OPEC members push for a consensus. In this case, the Saudis were outvoted 6-4. No agreement was reached chiefly because the Saudis refused to fold and accept the majority will of unchanged quotas. That refusal by Naimi may reflect the obviously growing Saudi disdain for and distrust of the Islamic Republic. Iran’s victory may come at a cost.
David L. Goldwyn, who until recently was the US State Department’s coordinator for international energy affairs, summed everything up by accusing the Islamic Republic of showboating. “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,” he told The New York Times.
Independent analyst Jim Ritterbusch told The Associated Press the Saudis are “reminding everyone who the sheriff is in town.”
Note: Different publications have provided different breakouts of the vote inside OPEC. The division provided here is what Naimi told the daily Al-Hayat.
