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Disharmonious OPEC is the Beginning of New Balance of Power

Jun 19, 2011 Written by  Chrisella Sagers, DC Correspondent

OPEC_-_Bloomberg

OPEC oil powers met in Vienna on Wednesday for their biannual meeting, but the oil-producing countries failed to come to an agreement to raise crude production, as was previously expected. Unrest in the Middle East provided a context to the meetings that prevented Saudi Arabia from being able to exert the deciding influence over the organization’s decisions that it has in the past. Saudi Oil Minister Ali Naimi declared to the press after that it was “one of the worst meetings we ever had.”

OPEC countries have divided into two camps. The currently victorious camp, with Iran, Venezuela, Algeria, and Libya, has voted to do nothing about the oil supply. All of these countries have very little spare oil supplies to increase their share of crude output, and all fear that releasing more oil into the market will only drive down the price of the limited quantity they can sell. They hope to use the increased revenue from higher oil prices to spend their way out of the unrest the Middle East has been facing, and currently Libya has been the only OPEC nation unsuccessful at that. Iran is OPEC’s second largest producer, after Saudi Arabia, and currently holds the rotating presidency of the organization, so it is likely using the opportunity to flex some muscle in the region. Venezuela’s Hugo Chavez is dealing with crumbling infrastructure, insufficient revenues from crude production to keep pace with internal demand, and a recent wave of US sanctions against its state-controlled oil company. Algeria is hoping to keep grumbling about low wages suppressed with increased spending.

On the other side of the table, Saudi Arabia, Qatar, and Kuwait all favored increasing oil production by 1.5 million barrels per day. Saudi Arabia, which has increased expenditures by the equivalent of $129 billion in order to tamp down dissent, holds most of the available spare oil reserves, and fears that a global drop off in demand due to skyrocketing prices will hurt revenue more than flooding the market will.

Oil futures went over $100 per barrel after the OPEC meeting brought new uncertainty to the commodities markets. The International Energy Agency predicted demand for oil to grow by 1.3 million barrels per day this year, after growing by a stunning 2.8 million barrels per day in 2010. The unrest in Libya has caused a 1.3 million barrels per day shortfall in sweet crude, an easier type of oil to refine than the Brent crude that most US refineries handle.

Saudi Arabia is expected to act unilaterally on the issue and increase production anyway, highlighting strained relationships in the region. Although none of the countries have ever completely stuck to the quota system, fractures in the twelve-member cartel have reached the point that some delegates are speculating an end to OPEC’s quota system completely. The Wednesday meeting especially highlighted the increasing rivalry between Saudi Arabia and Iran and their rising competition for regional hegemony that has most blatantly been playing out in the unrest through proxies in Bahrain. The balance of power of the Middle East has been shaken by the departure of three long-term authoritarian leaders and the uncertain future of Syria’s and Libya’s governments. This meeting is just the beginning of the emergence of a new balance of power, but it will take many more such potentially destabilizing confrontations before any kind of familiar rhythms or patterns begin to emerge.

Last modified on Thursday, 05 January 2012 20:37

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