Divided OPEC grapples with whether to cut production, prop up oil prices
By Steven Mufson,
With the global economy at a tipping point, a deeply divided Organization of the Petroleum Exporting Countries meeting in Vienna wrangled over whether to cut production and prop up crude oil prices.
Saudi Arabia, the world’s biggest oil exporter and the cartel member with the greatest latitude for tightening or opening its taps, arrived vowing to maintain its output and hold the line on quotas for the group. Other OPEC members, led by Iran and Venezuela, have wanted to trim output quotas to boost the price of oil.
Analysts said they expect no change in the end. With the approach of the traditional summertime surge in oil demand and with the imposition date for international sanctions on Iranian oil sales imminent, the Saudi government and other key OPEC nations have indicated their concern over stabilizing the oil market.
“Given the long-term nature of our industry and the need for clarity and predictability — not only for oil, but energy in general — I would like to leave you with three appropriate words: stability, stability, stability,” OPEC Secretary General Abdalla Salem el-Badri said in the prepared text of his opening speech to the group Wednesday.
The dozen members of OPEC accounted for 31.9 million barrels a day of oil production last month, about 35 percent of global oil supplies, according to an International Energy Agency report released Wednesday. OPEC’s output, fueled by higher Saudi and Iraqi production, has risen about 1.4 million barrels a day since December and 2.8 million barrels a day from May a year ago, the IEA said. The output substantially exceeded the group’s target, and members sought to reap greater revenue at high prices.
Although oil prices have slumped about 22 percent since the beginning of May, they remain high by historical standards and are a drag on weak economic recoveries in the United States and Europe. Saudi Arabia has kept its output around 10 million barrels a day to prevent the global economy from slowing so much that it permanently damages demand for oil.
“Despite the drop in prices in the last three months, we think oil prices remain inflated and the global supply and demand outlook doesn’t support current prices,” said Fadel Gheit, oil analyst at Oppenheimer & Co. The price of OPEC’s basket of crude oil blends stands at a 16-month low, but this year it has averaged $114.28 a barrel, a record. With the value of the euro falling and oil priced in dollars, European consumers are especially hard-pressed.
Other analysts say that prices will stay at or near current levels. They point to higher American gasoline consumption, which has risen past 9 million barrels a day for the first time since August.
The price of oil has been a closely watched variable for economic policy makers. High prices act in a way similar to tax increases, draining money from consumers and siphoning it out of consuming nations. Gheit estimates that “the Middle East turmoil [has] boosted average oil prices by about $25 a barrel, or $700 million per day, a staggering figure of more than $380 billion over the last 18 months.”
Gheit said crude oil prices “should be closer to” $70 a barrel for West Texas Intermediate, the grade of crude oil used as a benchmark for prices in the United States, and $80 a barrel for Brent crude, the London benchmark used in most of the world. The price of crude oil in New York closed at $82.62 a barrel Wednesday, an eight-month low, while Brent ended at $97.13.
U.S. and European efforts to squeeze Iran with oil and financial sanctions add a layer of political tension. The sanctions, designed to force Iran to allow inspections of its nuclear facilities, are lowering purchases of Iranian oil, and Tehran doesn’t want buyers to be able to simply turn to Saudi Arabia and other suppliers. Moreover, high oil prices can help compensate Iran for lower output and balance its revenue.
Saudi Arabia says it is simply responding to market conditions.
“Saudi Arabia doesn’t want to see higher prices on fears of a deeper global recession and increase in non-OPEC production. Iran needs the money to cope with economic sanctions,” Gheit said.
Predominantly Sunni Saudi Arabia and Shiite Iran have long been rivals within OPEC.
“Saudi-Iranian tensions are unusually raw at this meeting,” said Robert McNally, founder and president of the Rapidan Group, a consulting firm. “Beyond Iranian displeasure at high Saudi production, the Iranians accuse Saudi Arabia of exploiting sanctions to steal Iran’s market share while Riyadh insists it is just responding to market demand for its crude.”
He said they are also competing to fill the position of OPEC secretary general.
Both countries also rely on oil to finance their budgets.
Most OPEC members produce at or close to their maximum capacities. Saudi Arabia is the swing producer. With about 2.5 million barrels a day of exports last year, Iran is a key supplier. Europe is set to impose an oil embargo on Iran because of fears that Tehran is developing a nuclear weapon. The United States and Europe have clamped financial sanctions on traders, insurance firms and countries dealing with Iran’s central bank.