OPEC losing relevance as oil cartel
‘Cooperation within OPEC to either freeze or cut production can only trigger an upturn in oil prices. But the race for regional supremacy between Iran and Saudi Arabia may delay such cooperation.’
The desperate attempt by the Organization of the Petroleum Exporting Countries (OPEC) together with Russia to concretise a crucial agreement that would have bound members to freeze their oil production at the current levels has failed for the second time in the past three months. The idea to freeze oil production at January 2016 levels, to reverse the tumbling oil prices, was first mooted by the group in February this year but it also failed to take off due to Saudi’s inability to rein in Iran to adhere to the proposed plan. The commercial cohesiveness among the 13 member oil cartel seems to be thinning down. Does this reinforce the narrative of OPEC’s diminishing relevance in influencing oil prices? People supporting such a narrative argue that “OPEC has been losing its grip over oil prices since 2003 due to its dwindling spare capacity and completely lost control over it in 2008 when crude prices roofed to $147/barrel,” says Robert McNally, president of the Rapidan group, a US based energy consultancy.
“The price surge of 2008 showed that OPEC could not impose a ceiling on prices, and the 67% price collapse since the summer of 2014 indicates that it would not put a floor under them,” adds Mc- Nally who has also been an exenergy official in the George W. Bush administration. All 13 members are pumping oil to their full capacity and are trying to outdo one another to gain as much market share as possible. Saudi Arabia, OPEC’s de-facto leader, fears that if it cuts or freeze production unilaterally, in search of better prices, then Iran — who has re-entered the oil market after sanctions over its oil exports were lifted recently — would take away its market share. That is why the proposed agreement calls for freezing (rather than cutting) of oil production as it helps everyone.
Iran, the founding member of the cartel, has plainly refused to tow its arch rival’s line. It has in fact warned Saudis to make room for its return in the global oil market. Iran, who wants to re-energise its oil trade after a long gap, wants its oil production to reach the pre-sanctions levels (about 4 million barrels/ day) before it thinks to join the so-called freeze agreement. As indicated by Iran, such a scenario is unlikely before June this year. International sanctions imposed on Iran to give up its controversial nuclear programme have literally broken the backbone of the Iranian economy. Though oil prices are not so lucrative but every petro-dollar is precious for Iran.
But, prolonged low prices may not be in everyone’s (producers) interest, so, “I have a feeling that this stalemate may be temporary,” says Lydia Powell, senior energy analyst with Observer Research Foundation. She adds that cooperation within OPEC to either freeze or cut production can only trigger an upturn in oil prices. But the race for regional supremacy between Iran and Saudi Arabia may delay such cooperation.