RIYADH, Oct 22: Can the Organization of Petroleum Exporting Countries (Opec) continue to cut its output for long?
Most of the Opec economies are oil based and almost single product economies. But despite having the objective of keeping healthy cash inflow into its member states, Opec has already sliced a total of 3.5 million barrels per day off its production quotas this year to defend its central $25 per barrel target for its basket of crude oil exports. But with its oil basket prices hovering around $18.54 a barrel, currently much below the organization’s $22-28 targeted price band, it cannot keep quiet and let the prices in the market places slip away. It has to react and that is where the dilemma is. “It cannot continue to cut production output for long, otherwise it would yield market share to the rising non-Opec producers,” asserts Dr. Fadhil Chalabi, executive director of the London based Centre for Global Energy Studies (CGES) in an interview.
Opec however, has been indicating in the recent days it could cut oil output to prop up crude prices. In the meantime, it is apparently also wary of sparking a political storm by trying to send prices up at a time when the world’s major industrialized economies are heading into a recession. A decision to this effect is fraught with dangers of all kinds.
In view of the grim situation, the Iranian Oil Minister Bijan Namdar Zanganeh dashed to the Kingdom last week and resolved to do “whatever was necessary within the framework of the mandate of the Organization of the Petroleum Exporting Countries to maintain stability in the oil market”.
The Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi and his Iranian counterpart, “reviewed the whole gamut of problems including the issue of fluctuation of prices, supply and demand on the global level. The proposal for production cut was one of those and no specific figure for production cut was discussed during the meeting,” the ministers revealed after the meeting. The two leading lights of the oil industry reiterated there was no difference of opinion among the Opec members on the issue.
Earlier reports indicated that the major oil producers within the Opec were considering an oil output cut of between 700,000 and one million barrels per day. There were also hints that in case warranted, Opec may decide to announce a production cut even before its scheduled oil ministers’ meeting in Vienna on November 14. Swift consultations between Riyadh and Tehran, the two largest Opec producers, and other member states are reported to be continuing on the issue, so as to ensure ‘a fair price’ for their exports. “These attempts (to ensure fair price) would continue through consultations within Opec and discussion with key producers inside and outside the Opec, so that the price is fair for all and that there is no negative impact on the world economy,” Ali Al-Naimi was quoted here as saying.
But how long Opec can continue to shore up the falling prices by cutting oil production. “Demand is weak and in these circumstances cutting oil prices may result in Opec yielding market to non-Opec producers. Opec in the current scenario may be tempted to cut output to combat the falling oil prices, yet it cannot continue to do so for long,” says Dr. Fadhil Chalabi. The CGES was set up in London by His Excellency Shaikh Zaki Yamani, the former Saudi oil minister.
Dr. Fadhil also believed that with largest single proven reserves in the world, it is in the long-term interest of Saudi Arabia to keep its share in the market and not let it down considerably. However, he feels, in the times ahead in order to ensure a ‘fair price’, Saudi Arabia may well be required to either keep its own production levels down or let the prices fall. Then the Iraqi factor is also to be considered in the overall equation, he asserts. In case the current campaign spreads to other countries in the region, such as Iraq, it will have great impact on the market dynamics of oil. Iraq is currently producing close to two million barrels a day. A lot in the oil market would depend on the US policy on the issue, he stressed.
Opec is also mindful of some other considerations. It is in the meantime, trying to enlist support from non-Opec oil producers for any output reduction.
Meanwhile, the Venezuelan President Hugo Chavez has called on the Opec members to respect their individual quotas. Busting individual quotas has been a regular problem for the Opec. In recent years there has been indications that some Opec member states are overproducing than their prescribed output quota. The Monthly Oil Report of the CGES last month reported that Opec’s total production in July and August respectively were 26.685 and 27.583 million barrels a day, against the monthly production target of 24.201 million barrels a day. Analysts say markets might not even react to a cut, notably because Opec was already widely believed to be producing over its own quotas.
The Iranian oil minister admitted that quota compliance was a key issue for Opec. “Compliance is good, but we believe it should be excellent,” he told reporters after an unscheduled meeting of Opec’s Market Monitoring Committee, which usually makes a recommendation to a full ministerial meeting about how the Organization should act in a given circumstances. Weak economies, winds of recession in the industrialized world are all straining the already stretched oil markets. The current task before Opec is definitely not an easy one.