What’s Up With OPEC?
In 2014, the Organization of Petroleum Exporting Countries (OPEC) declined to reduce oil production in the face of falling prices. Last month, at a meeting in Algiers, OPEC went in the opposite direction, setting out a goal of capping production collectively at 33 million barrels per day.
Why the change of course? And does OPEC’s most recent pronouncement carry any weight?
A recent report from the Center on Global Energy Policy at Columbia University, and authored by
Antoine Halff, director of the center’s Global Oil Markets Research Program, provides some perspective.
According to Halff, the change in attitude was brought about by three factors: changes in the oil markets, changes within OPEC, and internal changes in Saudi Arabia.
Two years ago, OPEC’s primary concern was that increased production on shale oil in the United States was undermining their market share. By keeping production high and prices low, OPEC hoped to drive down shale oil production, which, in turn, would boost prices.
The tactic was at least partially successful, putting a floor under oil prices and driving shale production down.
“Two years into this process, however, the oil market recovery appears to have stalled,” the report noted. Oil prices have been stuck for months in the $40 to $50 per barrel range.
“Saudi Arabia’s all-out drive to ramp up production is running out of steam,” the report concluded.
At the same time shale oil’s swing capacity “has likely been degraded from” where it was two years ago “and Riyadh has probably less to fear now from a shale price response than it did then. Hence there is less downside risk from supply cuts now.”
Changes within OPEC involve the ascendancy of Iran at the expense of Saudi Arabia. Two years ago, Saudi Arabia dominated OPEC. “Today a resurgent Tehran is counter-balancing Riyadh,” said the report, “which seems increasingly preoccupied by two live wars in Yemen and Syria and an ambitious but challenging National Transformation Program.”
Iran has been critical of Saudi oil supply policy and the communique following the Algiers meeting reads like an indictment of that policy—and one in which Riyadh acquiesced.
Since nuclear sanctions were lifted, Iran’s oil production has jumped by nearly one-third and those gains were largely offset by price declines. For Saudi Arabia, according to the report, the revenue losses have been much more severe.
“While the hardship inflicted by international sanctions on Iran likely helped bring it to the nuclear
talks,” the report noted, “they have also prodded it into the kind of economic reforms that Saudi Arabia is only now beginning to undertake. Iran’s economy today is far less addicted to oil than Saudi Arabia’s.”
Saudi Arabia’s transition is proceeding on several fronts. A bureaucratic reform program has led to some degree of chaos on oil policy, with several different Saudi voices sending mixed signals while the upper echelon of the royal family has so far remained silent. Saudi Arabia also has growing fiscal problems, and thus has a greater interest in higher oil prices for that reason as well as for influencing the valuation of its planned 2018 self-off of five percent of the the government oil company ARAMCO.
At the end of the day, Halff is underwhelmed by the latest OPEC maneuver. “The Algiers deal seems more like a supply freeze than an actual production cut,” he wrote. Oil prices, however, initially jumped on the news of the deal.
But, the report noted, “the meeting did not really suggest any credible pathway to sustainably higher prices.”