Saudi Arabia, Opec‘s most powerful member, appears to be going out of its way to say the cartel will refrain from making a new round of cuts at its meeting Sunday. “Most members agree that … compliance with current [output] reductions will have better … impact on price stability than new production cuts,” al-Riyadh newspaper quoted an Opec source as saying.
That should please the White House. Late Friday Steven Chu, US energy secretary, said: “We will continue to send a strong and clear message to Opec nations about the importance of protecting the world economy from significant price increases that aren’t good for any nation.”
The International Energy Agency, the developed countries’ watchdog of which the US is the biggest member, drove home that message in its most recent monthly market report by showing what would happen to oil inventories if Opec simply adhered to its existing cuts:
But will Opec simply pledge to boost its compliance from an already impressive (and unusual) 80 per cent?
It is easy to see why Saudi Arabia is advocating such a policy after looking at the wide discrepancy between the members’ adherence to the 4.2m b/d they have already pledged to cut out of the market. The kingdom’s compliance is 108 per cent, while Iran, Opec’s second largest producer, is at 44 per cent.
As the IEA said in its recent report: “At one end of the spectrum, Saudi Arabia has delivered almost half the group’s collective 3.3m b/d production cuts since September and this past month may have produced below its nominal target. By contrast, Iran, Venezuela and Angola have collectively only reduced output by around 600, 000 b/d, or half the pledged 1.17m b/d. Combined, they account for 63 per cent of current overproduction versus target.”
The answer to what Opec may do Sunday lies at least partially in whether Saudi Arabia is willing to risk a slide in oil prices as the economy deteriorates to get the rest of the cartel to pull its weight.
Saudi Arabia, can weather low prices more easily than most of the laggards. The rest of the group will take any implicit threat Riyadh makes very seriously. In the past two decades, Saudi Arabia has already shown its willingness to spread a little (or a lot in the case of 1998) pain to get the cartel to behave.
In Jakarta in late 1997, just as the Asian financial crisis was gathering strength, Saudi Arabia persuaded its fellow Opec members to boost output by 10 per cent. The result was dramatic: Oil prices slid to below $10 in a matter of weeks and Venezuela, Opec’s biggest quota cheat, underwent the huge political shift that brought populist president Hugo Chavez to power.
For Opec, it was the most memorable moment in its recent history. Cartel watchers still debate whether Riyadh made the decision purposely or whether it was a huge miscalculation. Saudi officials deny the move, which eventually led desperate Opec members to come together and adhere to deep cuts, was premeditated. But the mere existence of doubt has become a powerful tool to keep members in line ever since.
