23.06.2015 Author: Viktor Mikhin

OPEC’s Decisions and the Future of the Middle East

5242111The ordinary meeting of the 167th ​​Ministerial Conference of the Organization of the Petroleum Exporting Countries (OPEC) has wrapped up in Vienna with the result that experts had predicted in advance. OPEC will maintain oil production quotas at the previous level of 30 mln. barrels per day. Thus, the participants of the cartel decided to stick to the strategy chosen at their last meeting of November 2014: to keep its share of the global market, rather than trying to influence the price.

After that, many experts in the oil industry unanimously called OPEC a dead organization, with only one country, Saudi Arabia, making all the decisions. For example, the vice president and official representative of “Rosneft” Mikhail Leontyev called ‘expected’ the OPEC decision to maintain oil production quotas at the same level: “No other decision could have been made. To decide otherwise, OPEC needed consensus and there is none. It is hard to imagine that, for example, Venezuela would support an increase in the quota in order to further reduce prices.” In this regard one must remember that these two countries, having approximately the same population of 30 million people and vast reserves (Venezuela — 298.4 bln. barrels, Saudi Arabia — 265.8 bln. Barrels) can manipulate not only OPEC policy but also world prices.

OPEC itself currently has no direct influence on prices and not only because the share of the organization in the global oil market has declined and independent OPEC producers account for a large part of the market. But also because, as the Iranian newspaper Tehran Times states, “in reality, under the guise of OPEC a single country acts with several satellites. It is Saudi Arabia who can affect the price. It, in fact, exerts its influence on them but this has nothing to do with OPEC, the organization, the cartel.”

In the past year, as you know, the leaders of OPEC, especially Saudi Arabia, explained the beginning of their short sale strategy by the desire to eliminate high-cost projects from the market. The main target was shale projects in the US and Canadian production projects from oil sands. The strategy worked — production growth in the United States and Canada has slowed considerably and the number of drilling rigs continued to decline ever since. According to oilfield services giant Baker Hughes, in May of this year, their number decreased by 8.9% (down to 889 units, compared to April) in the US and 11% (to 80 units) in Canada. For comparison, in January in the US there were more than 1.2 thousand and in Canada about 200.

In the period of growth in the demand for oil, observed today, the gap between supply and demand in the global oil market has become considerably less than 1 million barrels a day, as it was at the end of last year, but supply still exceeds demand. However, the paradox is that pricing does not only depend on the seller and the buyer but also on the monetary policy of the US Federal Reserve, which has decided to postpone raising the refinancing rate from June to the early 2016, resulting in criticism from the International Monetary Fund. The Managing Director of the Fund Christine Lagarde called for rates to be raised now. In terms of the oil market, the advice of the IMF head could once again crash the price of “black gold”, since the “dear money” will inevitably provoke an outflow of liquidity from the Asian markets to the “homeland”.

During the meeting the question arose: Will OPEC reallocate the quota within the organization in view of the oncoming withdrawal of sanctions against Iran and its return to the oil market. In this regard Iranian Oil Minister Bijan Namdar Zanganeh said that a request had been submitted to the countries of the cartel. He announced that six or seven months after the lifting of sanctions, Iran can increase the supply by 1 million barrels per day (up to 4 million barrels). In order for this new volume to fit within the OPEC quota, some of the countries of the organization will have to “make room”. However, there are no volunteers so far. As stated by the Secretary General of the cartel Abdalla El-Badri, OPEC is prepared to consider the request by Iran, but “there is no prerequisite yet. When Iran and Iraq increase production, we will sit down and discuss it,” he said, assuring that the reallocation of quotas for individual production between the countries has not been discussed. He added that the main challenge for the oil market until the end of the year remains fragile global economic growth. However, the entry of Iranian oil to the market will lead to a sharp drop in prices with Iran increasing the supply not a few months after the lifting of sanctions but immediately after that.

As you know, the EU and US imposed sanctions on Iran in 2006, and several times subsequently tightened them. After the talks in Geneva in late 2013 the sanctions were partially relaxed. Negotiations are currently ongoing. The “Group of Six” and Iran intend to finalize an agreement on its nuclear program by the 30th of June this year. At the same time the EU will stop sanctions against Iran after the latter performs the agreements reached and Iran is obliged to submit all its uranium enrichment programs to international supervision for a period of 25 years.

The position taken by Iraq at the meeting of OPEC is very interesting and speaks of various things, primarily, of the political trend of the Baghdad government. “Iraq hopes that the lifting of international sanctions against Iran will lead to positive changes in the regional economy, which will benefit many,” said Iraqi Oil Minister Adil Abdul-Mahdi in Vienna, “We have stated many times that we too have suffered from sanctions. Not only has Iran suffered from sanctions… We reject the sanctions — this is our principle. The sanctions are unjust. If the sanctions (on Iran) are removed, it would be the indicator of Iran’s improving relations with the West, with the United States, with Arab countries, and it would bring more peace to the region, and this will bring indirect benefits.”

This position is interesting, primarily because it is now quite clear that the current Iraqi leadership has fully sided with Tehran, from which it expects to receive effective assistance in the fight against the terrorist organization “Islamic State”. The Baghdad government has repeatedly expressed its dissatisfaction with the Washington’s policy, which is only limited to ineffective air raids against militants and delay of arms supply. At the same time, the United States, without agreeing its plans with Baghdad, supplies weapons to Kurdistan and Sunni tribes that do not obey the authorities.

The position taken by Iraq in Vienna in support of Iran makes it clear that Baghdad is now more inclined to joint policy with Tehran in all areas. It is clear that after the lifting of sanctions against Iran, the country will dramatically increase oil production and if we add to this the increase in Iraqi production of “black gold” by 1-1.5 million barrels the oil market will be overcrowded. This, in turn, will further strengthen the trend of lower prices and cause more than an oil war. In this regard, the decision taken in Vienna under strong pressure from Saudi Arabia not to reduce oil production is not only unproductive but also dangerous as it will not only have a negative impact on the price but also on politics in the Middle East.

Victor Mikhin, Corresponding Member of the Academy of Natural Sciences, exclusively for the online magazine “New Eastern Outlook”.