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Showing posts with label OPEC. Show all posts
Showing posts with label OPEC. Show all posts

Friday, June 10, 2011

Saudi Arabia meets Iranian OPEC challenge head on

The kingdom signaled its intention to confront Iran and meet potential shortages in supply as a result of disruptions of oil production in Libya and Yemen. (File photo)
The kingdom signaled its intention to confront Iran and meet potential shortages in supply as a result of disruptions of oil production in Libya and Yemen. (File photo)
Saudi Arabia is meeting an Iranian challenge to its leadership of the 12-nation Organization of Petroleum Exporting Countries (OPEC) head on in an escalating dispute between the group’s two largest producers that is raising questions about the cartel’s credibility and concern that it could lead to its demise.

The kingdom signaled its intention to confront Iran and meet potential shortages in supply as a result of disruptions of oil production in Libya and Yemen in the wake of mass anti-government protests and escalating violence by offering Asian refiners more crude. To be able to do so, Saudi Arabia will boost production next month from 8.8 million to 10 million barrels per day, the Saudi-owned newspaper Al Hayat reported.
The Saudi offers comes days after an OPEC policy-making meeting of oil ministers failed for the first time in a decade to agree on production levels because price hawk Iran supported by Libya, Venezuela, Angola and Ecuador for the first time in a decade refused to acquiesce to Saudi intentions to keep the oil price in check by ensuring that supply meets demand.

The meeting’s failure, a fall-out of an escalating cold war between Saudi Arabia and Iran as a result of mass anti-government protests sweeping the Middle East and Africa, sent stock markets south this week and sparked fears that oil prices could soar to $150 a barrel in the coming months and fuel inflation in consumer nations.

Saudi Arabia wanted to raise production from some 25 million barrels a day, a level that is already above agreed production quotas, to 30.87 million barrels to meet projected increased global demand of 2 million barrels per day more oil for the third quarter of this year and 1.5 million the fourth quarter.

The projected increase is driven by Asia with China and India in the lead. Asia is expected to burn 900,000 barrels per day more oil in 2011 than 2010, accounting for some 70 percent of the 1.29 million barrels per day in projected growth of global demand growth this year, according to the Paris-based International Energy Agency (IEA).

Unlike Iran and its backers who were hoping to hike oil prices to fund domestic spending, Saudi Arabia signaled with its unilateral production increase that it was seeking to slow down the rise in prices. Oil has been trading in recent weeks near their price highs in 2.5 years as a result of fears that the anti-government protests would prevent OPEC from meeting rising demand.

The Saudi decision to increase production is also designed to ensure that it maintains its market position in China at a time that OPEC and non-OPEC producers are competing to secure if not expand their access to the Chinese market. China is expected to bring online 500,000 barrels per day in new refining capacity this year.

The Saudi-Iranian cold war and the fact that OPEC members have broken with past practice of not airing publicly policy differences has tarnished the cartel’s image and raised the specter of it splitting into a Saudi-led group of moderates and an Iranian-led one of price hawks. Saudi Arabia’s Oil and Energy Resources Minister Ali Bin Ibrahim Al Naimi emerged this week from the OPEC gathering in Vienna saying in an unusually frank remark that it was “one of the worst meetings we’ve ever had.”

Questions about the cartel’s future are also being fuelled by the fact that OPEC’s next policy-making meeting is scheduled for December. Six months is a long time at a moment that turmoil in the Middle East and North Africa is more likely than not to get worse. That coupled with the fact that OPEC has been rendered impotent as a market maker and projected increased demand could send oil prices spiraling.

Few doubt that escalating tensions between Saudi Arabia and Iran played an important role in the crisis engulfing OPEC, but some analysts and OPEC officials argue that the differences between the two producers were more about assessments of demand and whether a production hike was needed than about political issues beyond OPEC’s purview.

Those issues stem from accusations by Saudi Arabia and its oil-rich Gulf allies that Iran is instigating protests that have already toppled the presidents of Egypt and Tunisia, provoked brutal crackdowns and escalating violence in Libya, Syria and Yemen and could threaten the governments of others in the Middle East and North Africa.

Saudi concern about Iranian interference is further fuelled by the fact that Shiite Muslim and Iranian assertiveness in the region has been on the rise ever since the last Gulf war that replaced the Sunni minority regime in Iraq of Saddam Hussein with Shiite majority rule.

Tension between Saudi Arabia and Iran heightened after Saudi troops entered Bahrain where a Sunni monarch was fending off predominantly Shiite protesters. Saudi Arabia has positioned itself as the leader of an Arab bloc determined to preserve the status quo in the region to the degree possible while Iran has championed the protests across the region except for in Syria, its closest Arab ally.

By signaling its intention to raise production and offering those refiners interested additional supplies, Saudi Arabia, one of the few, if not the only OPEC producer capable of increasing its output, signaled that is capable and willing to act as the stabilizer of the oil market.

The United States and other consumers are certain to be reassured by expectations that the kingdom is likely to thwart Iranian-led efforts to spark a price hike. The question is whether Saudi Arabia can single-handedly replace OPEC as the market stabilizer should this week’s failed meeting signal the beginning of the cartel’s end. 

COLD WAR: IRAN AND SAUDI ARABIA. BATTLEFIELD: OPEC


Saudi Arabia's Oil Minister Ali Al Naimi looks at documents at the beginning of an OPEC meeting in Vienna. (File photo)

Saudi Arabia's Oil Minister Ali Al Naimi looks at documents at the beginning of an OPEC meeting in Vienna. (File photo)
The Organization of Petroleum Exporting Countries (OPEC) has become the latest battlefield in the escalating cold war between Saudi Arabia and Iran, the 12-member cartel’s two largest producers.

The cold war, a fallout of mass anti-government protests sweeping the Middle East and Africa, already has stock markets heading south and could send oil prices soaring to $150 a barrel in the coming months, and fuel inflation in consumer nations.

Long-standing differences between Iran, a price hawk, and Saudi Arabia that has regularly engineered production levels that keep price hikes in check, came to head at this week’s OPEC gathering, the first in a decade that failed to end with agreement among the cartel’s members.
The escalating cold war between the two oil giants rendered OPEC incapable of meeting twin challenges: accounting for the turmoil racking the region and a weak global economy that needs increased oil supplies to drive recovery, but can’t afford spiraling prices.

Confidence among Asian refineries that Saudi Arabia would ensure that shortage in oil supplies would not occur was offset by concern that the Saudi-Iranian differences could paralyze the cartel for some time to come, given that turmoil in the region was likely to continue through the summer and, if anything, get uglier and bloodier.

The confidence that Saudi Arabia would ensure supplies and concern that the dispute was rendering OPEC impotent was reinforced by forthright remarks by Saudi Oil and Energy Resources Minister Ali Bin Ibrahim Al Naimi who, in a rare break with the cartel’s policy of presenting a unified front to the outside world, described this week’s policy-setting session as “one of the worst meetings we’ve ever had.”

Mr. Naimi made no bones about the fact that OPEC’s public face of unity was history and that the kingdom would sell more oil on its own if necessary.

Fears of an oil shortage stem from the disruption of oil production in Libya and Yemen, two countries where peaceful anti-government protests have turned violent and disrupted oil production.

Mr. Naimi’s comments contrasted starkly with efforts by OPEC Secretary General Abdullah Al Badri to downplay the political crisis gripping OPEC and portray the Saudi-Iranian differences as primarily economic.

Mr. Badri insisted that hard-line members of the cartel had objected to the cartel secretariat’s assessment that the global market would need 2 million barrels per day more oil for the third quarter of this year and 1.5 million the fourth quarter. Mr. Badri suggested that hardliners would welcome hikes of the price of oil that is currently already trading far above $100 a barrel to fund domestic spending.

Saudi Arabia and its oil-rich Gulf allies accuse Iran of instigating protests that have already toppled the presidents of Egypt and Tunisia, provoked brutal crackdowns and escalating violence in Libya, Syria and Yemen and could threaten the governments of others in the Middle East and North Africa.

Saudi concern about Iranian interference is fuelled by the fact that Shiite Muslim and Iranian assertiveness in the region has been on the rise ever since the last Gulf war that replaced the Sunni minority regime in Iraq of Saddam Hussein with Shiite majority rule.

Tension between Saudi Arabia and Iran heightened after Saudi troops entered Bahrain where a Sunni monarch was fending off predominantly Shiite protesters. Saudi Arabia has positioned itself as the leader of an Arab bloc determined to preserve the status quo in the region to the degree possible while Iran has championed the protests across the region except for in Syria, its closest Arab ally.

Within OPEC, Iran’s hard-line position and effective challenge of Saudi leadership was supported by Libya, Venezuela, Angola, Ecuador and Algeria, all nations that fear that increased production will drive oil prices down.

Those fears were reinforced by that fact that OPEC is already producing more than its official quota of nearly 25 million barrels a day. Saudi Arabia and Kuwait, the UAE and Qatar to a lesser degree are the only cartel members with the spare capacity needed to raise output to a daily 30.87 million barrels to meet OPEC’s demand projections.

The stakes for Saudi Arabia are high. This week’s OPEC failure to reach agreement could signal an Iranian intent to challenge the kingdom’s traditional leadership of the cartel. Iran may well have thrown down the gauntlet by refusing like in the past to ultimately accept Saudi influence on OPEC decision-making.

That would further complicate efforts by the United States and US and Europe to come to grips with the changing political map of the Middle East and North Africa who have traditionally relied on Saudi Arabia to moderate oil prices and are at odds with Iran over its human rights record, alleged fomenting of terrorist activities and suspicions that it is developing nuclear arms.

The cold war between Saudi Arabia and Iran is more than ever a global concern with its expansion into OPEC. A line has been crossed with Iran challenging the kingdom and the dispute playing out in public. OPEC, if it survives the battle between the two titans, is likely to never be the same again. It also suggests that the six-month old Arab popular revolt will ultimately leave little in the region unaffected, if not unchanged.