Ali Naimi, the Saudi oil minister, described Opec’s meeting last week to raise its oil production quotas as “one of the worst meetings we have ever had”. Saudi Arabia wanted the Organisation of Petroleum Exporting Countries (Opec) to open the spigots and pump out more oil to ease prices and help a global economic recovery in the making; but, in what was seen as an open challenge to its de facto leadership of the 12-member cartel, it was thwarted in its bid by seven members led by Iran.
So, is the cartel’s power centre shifting from Riyadh towards Tehran? “I do not think that there is a power shift,” says Ajay Arora, partner at Ernst & Young, dismissing talk of a collapse in Opec’s cohesion. “It is just a (short-term) opportunistic move by Iran (and others) to cash in on higher oil prices,” Arora adds.
Opec accounts for 42 per cent of the world’s oil supply. It could account for more, but prefers to limit its output by imposing quota limits on each member to keep control of the global oil price. Right now, however, it has a clear division within: between the haves (with spare capacity for extra output, like Saudi Arabia) and have-nots (like Iran). The latter do not have any economic interest in having quotas raised—the total is officially set at 24.85 million barrels per day, but many flout their limits—since it would result in revenue losses for them. In fact, the have-nots need a price above $100 per barrel, a floor that has more or less held good, just to balance their budgets. And the Middle East unrest has meant a boom in social spending in the region.
Ever since Opec was founded in 1960, however, Saudi Arabia has called the shots within the cartel. Even today, it is often called the ‘central banker’ of the oil market, since it has the largest spare capacity with which to flood the market if need be. In the 1980s, after a phase of faltering Opec unity, it signalled its power by opening the spigots so wide that the price tumbled, prodding other oil exporters, suitably chastened, into compliance with it.
Of course, Saudi Arabia is also a US ally while Iran is not, to put it mildly. So geo-politics also plays a role. After the latest meet, Saudi Arabia appears to have decided to push up production on its own. So, does this spell the decline of Opec? Arora thinks not. “Their level of control may decline slightly, but (in view of Opec’s large reserves) the power to price oil would be dominantly theirs.”