Has OPEC outlived its purpose?

With Saudi Arabia and Iran battling each other for influence in the cartel, is OPEC still able to control oil prices? Doubtful, not least since it’s more important to watch what Saudi Arabia does than what OPEC says.

Saudi Arabia, OPEC, Iran, oil diplomacy, King Abdullah of Saudi Arabia, Ali Al Naimi,
Will Saudi Arabian oil diplomacy be a gift to the world by delivering what the West has so far failed to do?

The Kingdom exports 6.2 million bpd, making it the world’s largest oil exporter, and controls 70% of the world’s spare capacity.

Will Saudi diplomacy work?

Through oil diplomacy, Saudi Arabia hopes to sap Iran of important regional partners, a diplomatic coup the US and other western nations have so far failed to achieve

Consequently the Saudi Minister of Petroleum, Ali Al Naimi, vowed to meet increasing world demand after the last OPEC meeting where members failed to reach an agreement. Or as its secretary-general Abdalla el-Badri put it were “unable to reach a consensus” between countries wanting a production increase and those happy to do nothing. In other words those agreeing with Saudi Arabia versus those siding with Iran.

Oil as a weapon

Already before the meeting Saudi Arabia had actually agreed to double its crude oil exports to India in order to reduce the Asian country’s dependence on Iranian crude.

Interesting and clever move. Have always wondered why the Saudis didn’t use oil as a weapon to, for instance, help the Palestinians. But better late than never to start using it in order to instead contain the mullahs.

Remember Ali Al Naimi telling me how strongly he felt that Saudi oil should be used for the good of the people of the Kingdom. Maybe their oil is now going to benefit not just the Saudi people but the citizens of the world?

If Riyadh can weaken Iran by supplying oil to countries, like India, that would otherwise need to get it from Iran, that’s really a good start.

Riyadh versus Teheran

OPEC now consists of two camps, those with spare capacity headed by Saudi Arabia and those who cannot pump any more oil, led by Iran.

In the first group, the Gulf states and the Kingdom believe that a high oil price is damaging to the world economy. Iran and its allies, on the other hand, are keen on a high oil price and hence don’t want more oil to get onto the market.

Riyadh has already pledged to fill the gap of Libya disappearing from the market. And my guess is that they will go it alone and keep prices in check. In particular if it works against Iran.

The deep divisions within OPEC, particularly between Saudi Arabia and Iran, appear to have become so poisonous that this organisation is incapable of taking any substantive decision.

So maybe it’s time for Saudi Arabia and the other Gulf States to join forces against Iran and through diplomatic efforts achieve what the West has so far failed to do.

Saudi moves behind the scenes

Not sure exactly what was said but I have inside information that King Abdullah sent Prince Bandar to Teheran in 2006 and told the Iranians to tell Hezbollah to stop waging war in Lebanon. And they did. Not sure what leverage the Saudis had against Iran but something made the Iranians listen. Maybe it was about oil?

Personally believe that the Saudis now are really motivated to act against Iran. Knew years ago that King Abdullah told George W Bush what would happen if the US invaded Iraq but was ignored. Saudi Arabia knows it can no longer rely on America to look after its interests so they will go it alone. And their oil is a potent weapon. If Saudi diplomacy against Iran works they will, in my opinion, be doing the world a favour. What do you think? Has OPEC outlived its purpose? Is it a good idea for the Saudis to carry out oil diplomacy against Iran? Will they succeed where the West failed? Or should it be left to the West to contain Iran? Can you think of any other way to stop Iran from creating problems and trying to take advantage of the Arab Spring? Or maybe you believe Iran should be left to their own devices?

Photo: The White House – Flickr

24 thoughts on “Has OPEC outlived its purpose?

  1. While OPEC members control oil flow, commodity traders set oil prices by bidding on oil futures contracts. Of course traders take into account oil supply, politics, jittery financial markets and what OPEC is doing. But OPEC has much less control over market prices than many people think. This consortium matters but it is just one element in the mix of factors influencing supply and price (many OPEC countries have ignored decisions by the group and unilaterally decided when and how much they would produce)

    1. Good comment that I agree with Jeannette. But it's gone one step further now with a "cold war" being waged in the cartel by Saudi Arabia and Iran. And I'm sure we all want the Saudi group to "win".

    2. I totally agree with you. Today other countries are investing in exploration and production of oil. Brazil and South America in the future will be big productors, and this can help to move the center of oil. Maybe in the next 20 years, opec will have much leess control than have today

  2. An interesting article, Catarina. Saudi has gone it alone, as you put it, before – introducing stability when the oil markets have been unstable. I'm not sure why they haven't yet done so this time, particularly as they're on record as saying that they believe a price of $75-$80 pbb is fair. Of course, this is below the reported production price for Iran, so a market price at that level would really not suit Iran (nor a couple of other high-cost producer countries).

    Dropping the price to this level would undoubtedly help the global economy as developed nations would see less income being spent on fuel, freeing it for other spending and leading to growth.

    I just wonder why Saudi hasn't managed to get the oil price down to this level yet.

    1. Glad you agree with me Guy! Excellent points.

      Let's hope Saudi oil diplomacy can bring the price down to below the reported production price for Iran. That would be a significant blow to the mullahs and benefit the world. And in the long run be good for the Iranian people, as well.

  3. The issue Saudi Arabia has with Iran is analogous to the man selling apples $1,000,000 each. When questioned on the price he replies, "True, but I have to sell only one."

    It is less a question of price/production than it is of stability and future demand.

    Can Saudi Arabia rely on Iran to be an ally?

    "Me and my cousin against my neighbor, but me an my brother against my cousin."

    We don't have allies in the Middle East. Only expedient arrangements.

    End part I
    My recent post Side Street Journal Monday 20 June 2011

  4. As we cannot tell what Iran will look like this afternoon, let alone tomorrow, it is impossible to tell. OPEC, there is strength in unity, is the collective power of oil producing countries. The only way it will become irrelevant is if the importance of oil diminishes. Electric cars and China's nuclear energy programme are fine, however, this will have little effect on diminishing the importance of Middle East Oil in the short term–10 to 20 years?

    More important is this Arab Spring and the effect it will have on global diplomacy. Have you ever worked for someone who'd just been promoted to boss?

    OPEC may be the glue that holds the coalition of newly liberated Arab States.

    Regards,

    Slim

  5. This is something I was not aware of Catarina. At the moment as you have said Saudi Arabia is in effect keeping Iran under control. Is there any chance that they would ever come together on oil production and price?
    My recent post Do You Want The Good News Or The Bad News First

    1. Let's hope the Saudis succeed with Iran where the West has so far failed, Susan. Doubt very much that the Saudis and Iranians will ever come together. The Mullahs are trying to take advantage of the Arab Spring at the expense of Sunni muslims. Teheran has already caused a lot of trouble in Palestine, Iraq and Lebanon. Hopefully it will stop at that.

  6. Oil IS a weapon and one that has cost millions of people their lives. The fact that the U.S. would rather make us pay the higher prices per gallon rather than open up American reserves proves that this is all a tactic and another in a line of strategies to cause long term pain. I hope you're right.

  7. I just hope the rivalry of Arab and Iran won't cause any problems or conflict between them. Iran shares a religion and political and economic interests with Saudi Arabia so I just hope that the oil issues would be resolved soon. I wonder how Saudi Arabia would benefit from supplying India politically. I haven't think of anything that would stop Iran from taking advantage of Arab spring but whatever it is, I just hope it won't cause war or terrorism.
    My recent post Alpiste para bajar de peso

    1. Lola, there already is a "conflict" between Iran and Saudi Arabia. Oil is just a weapon KSA can use to get oil prices down to the level it costs Iran to produce – $75-80, or lower. That will, unlike Western sanctions have an impact on the Iranian economy. Iran will not be able afford to take advantage of the Arab Spring if they don't get incomes from their oil. That's why the Saudis arranged a deal to supply India with oil i.e. take the big customers away from Iran.
      'Hope I have explained the Saudi strategy clearly.

  8. It would seem that should Saudi Arabia view Iran as a destabilising entity, it could and it appears will, use oil as a weapon to either force Iran to comply with generally accepted views of the Middle Eastern Oil Producing Nations, to destabilise it to the point of neutralising its potency as a contentious force.

    "Me and my cousin against my neighbor, but me and my brother against my cousin." Not heard in a long time.

    However, no one should get too happy about contentions in the Middle East serving Western interests. As Grandma Milly used to say, "Two heads on one pillow."

    The West will not find allies among some Arab nations against other Arab nations except where it is expedient to ally with the West. Once resolved, the comity is over.

    Regards,

    Slim
    My recent post Side Street Journal Wednesday 22 June 2011

  9. Very interesting article Katrina! Based on your expertise, does it appear that there is a peacful resolution in sight?

    1. Thank you Leigh. Unfortunately I believe that the resolution is way into the future. Iran is intent on getting as much power as possible in the Middle East. And they will are not going to give up. Eventually, but not in the near future, the leadership in Iran will change though. No country can be supressed the way they are forever.

  10. Hi Catarina,

    thanks for sharing your insights about an interesting topic. To be completely honest, I haven't a true answer to your question. Aren't all cartels outlived right from the beginning ?

    Take care

    Oliver
    My recent post What Are Your Beliefs About Work ?

  11. Lou, Saudi Arabia is actually doing more for the West than any other country. If it wasn't for them the recession in the US & Europe would be even worse. Interesting isn't it considering all the Saudi bashing in Western press since 9/11.

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