Riyadh did not appreciate the attempt made in Vienna to forcefully reduce oil prices. Addressing surplus earnings from oil is first and foremost the responsibility of OPEC – no one else. Nevertheless, pending OPEC’s meeting in Oran this December, oil prices will remain below the $100 marker.

By Ihsane El Kadi, Algiers

The decision to lower OPEC oil production by 520,000 barrels per day was not taken seriously by the oil market. OPEC’s current president, Algerian Energy and Mining Minister, Chakib Khelil was the first to deliver a mortal blow to the agreement reached in Vienna by his organisation the week before, admitting that it had failed. “The oil market’s current state is a result of speculators’ practices,” he stated. “OPEC’s decision to reduce its production has proven to be ineffective against market speculation,” he acknowledged on Saturday, 13th September, barely 72 hours after the surprise announcement from Vienna calling for a return to the production levels in existence before the September 2007 decision, amounting to 28.8 million barrels per day. This excludes Indonesia which has left the organisation. The announcement that OPEC would be reducing its production did little to prevent the price per barrel in New York from falling below the symbolic 100 dollar threshold, while hurricane Ike was pummelling oil rigs in the Gulf of Mexico and oil refineries in Texas, thus paralysing 22% of America’s oil producing potential. The OPEC president suggested in his statements to the Reuters news agency that he had expected the manoeuvre to fail. “At the next OPEC meeting, scheduled to take place on 17th December 2008 in Oran (Algeria), we will come to a decision that, we hope, will produce more favourable results,” he added. But what about the September 10 agreement “did not work” to make it so ineffective against speculators?

Camouflaged revenge

In the inner circle of the current OPEC presidency, it is the way that the agreement was reached from the 9th to the 10th in Vienna that left it weak. “Venezuela and Iran were successful in getting other countries to support the return to the quotas we had a year ago. But their victory was fleeting. Saudi Arabia holds the whole deck of cards as it produces most of the industry’s surplus earnings. They should have worked to reduce oil prices by working with Saudi Arabia, not against it,” explains a source in Algiers who was present during the cartel’s talks. Saudi Arabia, which had promised its American ally that it would not go against “a market correction” that would bring the price of oil below 100 dollars, “was made a fool of”. Leaks alleging the world’s largest oil exporter would not immediately apply OPEC’s decision were truly “nothing more than camouflaged revenge”. These rumours completely destroyed the outcome for which OPEC had hoped.

Oil market experts estimate that 80 dollars is the per barrel price western countries are prepared to accept as it corresponds to the profitability threshold of new offshore oil production as well as that from very distant regions launched by their oil companies in a more costly energy market. The drop in oil prices over the last three months from 147 to 100 dollars a barrel is due to unilateral intervention from Saudi Arabia which pumped out an additional 500,000 barrels per day. Speculators are not wrong to play on this trend if Riyadh decided to ignore the Vienna agreement. When the Algerian minister says he “hopes that OPEC will find a more effective solution” in Oran this December, it means he expects the organisation to come to some consensus by that date on “the right amount” of oil that OPEC should provide to the global market. This is the kind of consensus that the cartel’s president thought they had reached before the meeting in Vienna when he sought to affirm, following the analysis of the Saudis, that oil production levels would be maintained, though events would later disprove this prediction. With this in mind, one can more easily understand why the Algerian minister was so eager to announce the failure of an oil reduction decision whose effect he failed to correctly anticipate.

A questionable compromise

OPEC’s division on the response the organisation ought to have to the decline in global energy demand – a universally accepted reality – is not likely to change before the next ministerial meeting. On one hand, Venezuela and Iran, backed by Nigeria, have pressing social needs and international policy considerations. They are in favour of a firm stance on oil pricing. On the other hand, Saudi Arabia and other oil producers of the Gulf States, apart from the noteworthy exception of Kuwait, are in favour of a market share policy due to significant reserves and comfortable surplus earnings. The former are for decreasing production while the latter prefer to produce more and maintain, on the outskirts of the market, producers of expensive oil, kept buoyant due to the rarity and high price of oil. Traditionally, Algeria tends to side with the first group. With its mandate as president of OPEC, it put its approach to the market on the backburner in order to act as a referee between the two extremes in an effort to bring them closer together. This tactic failed. “If Saudi Arabia’s silent refusal to observe the Vienna agreement were to become apparent in the coming weeks, we would face an internal crisis at the next meeting in Oran. Furthermore, it is uncertain as to whether or not an additional meeting may need to be held before the one scheduled in December,” declared an Algerian source close to OPEC. Oil market experts estimate that 80 dollars is the per barrel price western countries are prepared to accept as it corresponds to the profitability threshold of new offshore oil production as well as that from very distant regions launched by their oil companies in a more costly energy market. Saudi Arabia has already said that 80 dollars per barrel is “a fair price” in 2008. OPEC’s meeting in Oran promises to be even longer than the precious meeting in Vienna.