Saudi Arabia Openly Defies Iran and Opec by Upping Oil Output to Contain Global Demand

Kent Harrington

Kent is a videographer and professional storyteller. He regularly blogs for AIChE on ChEnected. See his latest posts below. You can also follow Kent on twitter @harringtonkent.

June 16, 2011

Opec talks in Vienna rancorously broke down last Wednesday. "We were unable to reach an agreement--this was one of the worst meetings we have ever had," Ali al-Naimi, oil minister for Saudi Arabia, Opec's biggest producer, told Reuters. And these statements shouldn't be taken lightly, because they mark out the future rules of engagement. This year, The New York Times reports, tension increased between Saudi Arabia and Iran, both competing to catch up with and shape volatile regional events, particularly in tiny Bahrain, where more than 1,000 Saudi troops are supporting a Sunni monarchy against mostly Shiite protesters supported by Iran. And every response and counter response has growing symbolic weight: the proxy for the lingering fallout of the Iraq and Afghanistan Wars.

Saudi oil minister, Ali ai-Naimi

Saudi Arabia and Iran lobbied aggressively

Iran, which holds the revolving OPEC presidency this year, successfully blocked Saudi efforts to raise official production quotas. This involved intense lobbying by both countries, because the United States had put pressure on Saudis to deliver a credible deal to cap crude prices to prop up slowing economic growth; but Iran needed the added revenue, and still felt the humiliation of the Green revolution, the sting of tightening sanctions, and acrimoniously assumed that the US was involved in the stealthy Stuxnet attack which, at least temporarily, crippled the Iranian enrichment program.

The balance of power shifted As the only member that has sufficient spare capacity, Saudi Arabia is easily the largest exporter in OPEC. This production muscle normally allows the Kingdom to get its way. But during the heated political debate, Saudis struggled to try to dominate the meeting. Temporarily, the balance of power shifted away as Iran flexed its own diplomatic muscle, finding allies like Venezuela, who has been miffed at the the US for years. This caused global reverberations, making oil markets jittery about the eventual, but by no means obvious, outcome. Saudi's Naimi said OPEC's four Gulf Arab countries had proposed the 12-member group increase output by 1.5 million barrels a day to 30.3 million barrels a day, including Iraq which is not bound by an OPEC quota. But this time those politically opposed to the United States--in particular Iran and Venezuela--found enough support to block Riyadh. Ironically, since many countries, including Iran, are already exceeding the quotas, it was largely a symbolic slap. Saudi Arabia was left isolated by a majority--Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran--who wanted to keep production unchanged. (Nigeria remained neutral). Iran said that supplies were adequate for the time being. "Iran believes there is no shortage of supply," acting Oil Minister Mohammad Aliabadi told Reuters. In a report from the Associated Press, the Iranian oil minister speaks (video above).

Rising demand from China

The Saudi newspaper Al-Hayat reported on Friday that Saudi oil officials had decided to increase production to 10 million barrels a day in July, from 9.3 million barrels, with most of the additional output going to China. Stepping outside OPEC was not unexpected. After the unruly meeting, Saudi Arabia decided to go it alone. Participants and analysts viewed the decision as a slap at Iran, showing that Saudi Arabia still remained the most powerful OPEC member--inside or outside the cartel.

Still, there is only so much Saudi Arabia can do in a tightening world market. The country has an estimated spare production capacity of 2.5 million to 3 million barrels a day. This is a thinning cushion as violence spreads in area of the Middle East and oil consumption grows. The fighting in Libya has taken 1.3 million barrels off the world market, and the turmoil in Yemen and Syria has subtracted an additional 300,000 barrels. China, the world's largest oil importer, purchased 876,000 more barrels a day this May compared to last year. OPEC has estimated that global demand would rise by 2.5 million barrels a day in the second half of the year, reaching a level higher than current OPEC production and implying a draw in inventories.

How will this finally play out?

Photo: oil pump, Eric Kounce, wikicommons Photo: Ali al-Naimi, AljazeeraEnglish, YouTube screengrab Photo: Oil rig at sunset, iStockphoto

Comments

This meeting was interesting for the drama and politics. This may be the beginning of the end of a unified front from OPEC as their individual situations diverge too much. I don't think that they will officially split anytime soon, but there are rough waters ahead. Similar to events in the Euro-zone. There will be a reassessment of what the group is expecting to get out of being a group and their individual roles. As for what it will do for actual supply on the market...very little. As was noted, many of the member don't follow their quotas anyways, pumping as much or little as fits their needs for cash or political capital. That will continue. China may be the largest importer, but they have long had a strategy of getting oil where ever they can get it. They are willing to go to smaller, less stable providers and make up volume that way. They are going to buy whatever it takes to keep their industries running. Aside from the politics, this was also a clash of the haves and have-nots. As the numbers were quoted, Saudi is one of the few places with spare capacity and the largest reserves. They can afford to pump more to try to lower the price, still make more money, and not worry about running dry. But if you are Iraq, Iran, Venezuela, or other country running at max capacity. Or capacity is being limited by internal strife or poor infrastructure or limited investment. For them it makes sense to throttle back a little and make more money per barrel. They see their reserves declining and might want to start putting away for a rainy day. Reserves and capacity are going to start playing a bigger role in future discussions.

Nice to hear from you again. Your comparison with the Euro-Zone is absolutely true. How does Israel's off-shore natural gas figure in this picture? Have you heard about their attempts to successfully bring up oil from a large oil shale deposit.?

Thanks, good to be back. Been buried at work. I have not heard too much about Israel's gas or shale deposits. Either way, I don't think Israel has the scale (supply or demand) to effect an OPEC discussion. But in local terms, the more that Israel has to interact with their neighbors (ether by selling, buying, or otherwise sharing resources) the better the long term prospects are. They have a rather functional relationship with their neighbors regarding water management - I think mostly because they have no choice. If everyone is forced to the table with a real problem to solve they can do it, if it is not urgent they are going to let the status quo slide.