At first glance, OPEC, the oil-exporting countries' alliance established in 1960 by Iran, Iraq, Saudi Arabia, and Venezuela, must be reliving the good old days with spectacular oil prices reinstated and its end-of-the-year gain as projected by the IEA inching towards a trillion dollar mark. The figure, however, reflects only the brighter part of OPEC's present-day picture, the downside being that its formerly robust internal consensus is being washed away by a tide of financial egotisms and national rivalries…
The bottom line of the June OPEC meeting is that its member-countries failed to bridge the gap over the key issue of upping production quotas. Saudi Arabia pushed for adding 1.5 million bpd to OPEC's daily output, a measure supposed to induce a drop in oil prices from the current $100/b to around $80/b and to help the US and European economies climb out of recession.
Evidently, Riyadh's pledge to pour extra oil into the global market (combined with marked neutrality over the NATO campaign in Libya) must convince the West to adopt a position of tolerance towards Saudi Arabia's dispatching reinforcements to quell Shia protests in Bahrain. The plan, however, got no green light at the last OPEC meeting, and the quotas remain where they have stood since January, 2009.
Kuwait, Qatar, and the United Arab Emirates were the only countries receptive to Saudi Arabia's attempts to negotiate a downward oil-pricing trend in Vienna. Upset, Saudi oil minister Ali al-Naimi slammed the meeting as the worst on OPEC's record. The opposition to Riyadh's plan was, with the backing from Venezuela, Algeria, Angola, Iraq, and Libya, spearheaded by Iran, the country currently holding the rotating presidency in the alliance. From a wider perspective, divisions within OPEC undermine the alliance's stated mission of stabilizing the oil market and guaranteeing decent terms to producers along with the security of supply – to importers.
In fact, OPEC's internal problems can be traced back to the days of the recent serial regime changes across the Arab world. Widespread poverty used to go unchallenged as a backdrop to the Arab street, but these days things are changing and popular leaders openly preach that the revolutions spilling from social media to city squares not only serve to tame authoritarian appetites but also empower masses to bounce perks and benefits out of the no longer immune governments. The Moroccan administration's financial compromise was a vivid example of how the game is played by the new rules. The lesson promptly absorbed by kings, sheikhs, and dictators is that, for fear of being unseated, they must divert parts of their mega-revenues to the awakened nations. As commentator Mathew Hulbert was quick to stress in his remarkable piece in the European Energy Review, the coming redistribution of the riches generated by oil export “will inevitably entail broader control of natural resource wealth as part of the package”.
The Saudi dynasty which is trying to preserve in a frozen form an archaic political and socioeconomic system is fairly comfortable with the above scenario. Riyadh plans a $129b financial infusion in improving Saudi Arabia's living standards and life quality to keep the machine running smoothly, and implicitly cites the Bahrain campaign to send the message that stability will be maintained ruthlessly and regardless of costs.
Occasionally, watchers do express the view that Saudi Arabia's stability can no longer be taken for granted. Following an epoch of heightened and disastrously wasteful interventionist activity, the US seems to realize that there is no alternative to finally toning it down. If the shift materializes, the Saudi monarchy will momentarily find itself exposed to serious risks. What is going to happen if Saudi Arabia, the pillar of the West's energy security, is confronted with a profound systemic crisis? What if Riyadh's influence over its OPEC peers evaporates? How will the world be affected if the whole region gets drawn into a turbulence zone?
Saudi Arabia supplies 9 bpd of oil to the global market, with Iraq further contributing 2.7 million bpd, Kuwait, Qatar, and the United Arab Emirates combined – 6.5 million bpd, and Algeria – 2.8 million bpd. Overall, OPEC keeps online 29 million bpd of crude, which is over a third of the world's total, and sits on around 1,000 billion barrels of proven reserves of oil. Those owned by all non-OPEC countries add up to 273 billion barrels, meaning that OPEC is a de facto global monopoly holding 4/5 of the proven reserves available.
Shakiness of supply would immediately cause traders to send oil prices rocketing, with dire consequences for the importing countries' macroeconomic performance. Even if the worst-case scenario remains entirely on paper, the weakening of the West's grip on the key oil-producing region automatically turns the spotlight on alternative suppliers. To further complicate the situation, for many of the oil-exporting countries the costs of home stability are reaching epic proportions. For example, just a few years ago the regime in Saudi Arabia confidently stayed afloat with the market fetching $20/b, but nowadays Riyadh cannot balance its books unless the floor is set at $88/b. Probably, Saudi Arabia can start pumping more crude than it does currently or even survive prices lower than today's, but the very existence of a pricing threshold below which a budget deficit opens, welfare policies stall, and outbreaks of mass discontent are likely is an unprecedented phenomenon.
Circumstances thus combine into a vicious circle as OPEC countries grow dependent on high oil prices due to purely domestic factors. According to Hulbert, “There are simply no price moderates left in OPEC ranks – merely gradations of hawks – all of whom increasingly regard $100/b as a crucial break-even price for oil”. This in turn drives what Hulbert refers to as “bullish price expectations” and, eventually, leads to still higher costs of crude. At the same time, as the Vienna meeting clearly showed, the rift is widening in the OPEC ranks which can sooner or later escalate into a full-blown divorce.