Sunday, July 3, 2011

Is OPEC Headed for Collapse?

In the comments section of one of my previous articles, a reader asked me whether the collapse of the Organization of Petroleum Exporting Countries (OPEC — responsible for 40% of the world’s petroleum output) is likely in the near future. Fair question, especially in light of the currently dysfunctional state of the Arab League. Are we really about to witness the end of a monopoly on global oil prices?
In short, it is too difficult to predict either way. I discussed earlier how the  Gulf Cooperation Council (GCC ) is starting to replace the Arab League as an inter-Arab political body and Sunni axis against Iran, shifting the onus of decision-making to the Gulf region. However, some of OPEC’s most prominent members — Saudi Arabia, the United Arab Emirates (UAE), Qatar, and Kuwait — are also part of the GCC, and it is notable that neither Syria nor Egypt, both of whose states of political turmoil have been responsible for the Arab League’s decline, is a major exporter of petroleum or member of OPEC. Thus, the growing importance of the GCC as opposed to the diminishing relevance of the Arab League is unlikely to have a major impact on OPEC’s future.
What is more interesting, however, is the conflict within OPEC between a bloc of states led by Saudi Arabia and other OPEC members, led chiefly by Iran and Venezuela, on the International Energy Agency’s (IEA) decision to tap into “strategic” (or “excess”) stockpiles of petroleum in an attempt to boost output, provide relief for high oil prices, and to stabilize the global economy. The IEA hopes to increase production by around 2 million barrels per day. Following a meeting that resulted in a deadlock at OPEC’s headquarters in Vienna on June 8, Saudi Arabia, the UAE, and Kuwait parted ways with other OPEC members and promised to raise production levels by 1.5 million barrels per day. Indeed, over the past month the Saudis have already increased output by approximately 500,000 barrels per day.
Now, ostensibly, Saudi Arabia is complying with the IEA’s initiative, but John Shimkus plausibly argues for another motive behind the Saudis’ behavior: namely, fear of Iran’s nuclear program, which is probably striving to develop nuclear weapons. As pointed out before, Iran has been at the head of an effort to block release of excess oil reserves. Hence, we should not be surprised if Saudi Arabia and its allies in OPEC might wish to flood the market with their own petroleum in the hope of bringing Iran’s government to the point of bankruptcy and thereby halting the Islamic Republic’s goals for its nuclear program.
To achieve such an objective, the Gulf nations led by Saudi Arabia would have to produce an extra 4 million barrels per day, besides having to enforce a naval blockade against Iranian oil tankers. Of course, the latter act is a remote prospect, as it would be perceived by Iran as a casus belli. Therefore, as Shimkus concludes: “What is more likely to occur is a continued increase in supply coming from Saudi Arabia [resulting in a] prolonged cut into Tehran’s oil profits.”
Nonetheless, Saudi Arabia also faces the problem of competition from Russia in the oil market further east, where much Gulf oil is heading to facilitate the expansion of growing economic powers such as India and China. Russia now supplies almost five times more crude oil through its East Siberia-Pacific Ocean (ESPO) pipeline than in 2008, and given ESPO oil’s higher quality, there is much more incentive for refiners in East Asia to buy Russian petroleum over Gulf oil grades, such that Russia now sells around 300,000 barrels per day to China.
To sum up: while the state of the Arab League has little bearing on OPEC’s functioning, there is potential for a major split within the cartel concerning the question of boosting output to dampen high oil prices and stabilize the global economy. Unsurprisingly, the rivalry is once again between Saudi Arabia and Iran. The Saudis could try to attain a massive growth in petroleum production, but one wonders whether the Wahhabi kingdom can compete with Russia in the lucrative Asian markets, perhaps leading to a reversal on Saudi Arabia’s plan to go along with the IEA. All we can do is watch how events will unfold.
Yet the more important point is that the United States cannot depend on oil imports for much longer. It is undeniable that demand for petroleum is accelerating at a much quicker pace than possible short-term increases in output. The need for energy independence is becoming ever more urgent.

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