OPEC to Make Supply Cut Decision

A decision to slash production is expected by OPEC as the oil cartel faces its biggest test in more than a decade. But newly released data reveal that the cartel’s vastly divergent economic circumstances will make the divided group’s decision of how much to cut even more difficult.

The problem for the oil exporters, who meet for an emergency session in Vienna on Friday, is to find a way to stop the price drop at a time when oil consumption is falling markedly in industrialized countries. Even the Chinese economy, long the biggest engine of growth for oil demand, seems to be cooling.

PFC Energy, the Washington-based industry consultants, calculated that Opec countries needed next year’s oil prices to be anywhere from $10 to $100 to keep their import expenditures and export revenues in balance. The tiny nation of Qatar needs oil to be only $10 a barrel, while Iran requires $100. Saudi Arabia, Opec’s most powerful member, needs oil to average $50 a barrel.

Comments by energy ministers have already begun to reflect their countries’ divergent economic needs. Estimates of how much Opec will have to cut range from 500,000 barrels a day to 2.5m, with some favouring a multiple step approach. Chakib Khelil, OPEC’s president, said last week that an output cut was “obvious” and suggested the group might meet often in coming months for further adjustments.

Algeria and Libya, Opec’s less aggressive price hawks, pushed for Friday’s emergency meeting and back a large cut in production. Venezuela and Iran, the perennial hawks, have also demanded decisive action.

But Saudi Arabia, Opec’s most powerful member, has kept quiet. All the market has to go on are anonymous comments published this week by Al-Hayat, the Saudi-owned paper, which appear to reflect Riyadh’s more conservative thinking.

The paper quoted an unnamed source expressing “doubt that demand for oil will adjust [downwards] requiring a substantial cut in production”, adding that it was still uncertain whether even 500,000-1m b/d needed to be cut.

That contrasts with Chekib Khelil, Algeria’s energy minister, who said this week: “There is no doubt that all members agree that oil inventories are very high and supply is higher than demand by around 2m barrels per day.”

Iran, Venezuela and Nigeria have even more divergent views as internal problems robbed them of the ability to boost production when oil prices were high and their peers – especially Saudi Arabia – were reaping the benefit of their better-functioning oil industries.

History suggests that OPEC will face a tough time propping up prices as oil consumption slows and the world teeters on the edge of a global recession, analysts said. Some experts warn that if the cartel took too much oil off the market, it could push prices up so much as to worsen the global economic crisis.

History suggests that OPEC will face a tough time propping up prices as oil consumption slows and the world teeters on the edge of a global recession, analysts said. Some experts warn that if the cartel took too much oil off the market, it could push prices up so much as to worsen the global economic crisis.

The International Monetary Fund estimates oil and gas exports from countries in the Middle East and central Asia this year will amount to $1,100bn (?839bn, £651bn), up from $700bn in 2007. To balance their budgets, almost all the active Opec members of the Gulf Co-operation Council need oil prices to trade between $23 and $49 a barrel.

Francisco Blanch, analyst at Merrill Lynch, said: “Most GCC countries bear similar budget burdens, but Iran, Venezuela and Nigeria do not. More interestingly, these three countries have already been at odds with the broad Opec policy in recent months, perhaps reflecting their own domestic production problems.” He added: “More important, Opec members have completely different agendas.”

Saudi Arabia and many of its Gulf neighbours worry more about high oil prices eating into their own market share as the world invests in developing expensive pro­jects outside Opec, including in alternative energy.

Meanwhile, Riyadh, Kuwait City, Abu Dhabi and Doha are Washington allies and have little interest in alienating their biggest customer’s new president in the final fortnight of the election campaign. Caracas and Tehran, on the other hand, have frequently used oil as a rhetorical weapon in their political confrontations with Washington. But all Opec countries do have a common issue: the prospect of the decline of their wealth.

“While the nominal price declines will hit the financially weaker, all in Opec cannot get away from the perennial problem of a persistent decline in their real and currency-adjusted purchasing power,” David Kirsch, analyst at PFC Energy, said in a note on Tuesday. He calculated Opec needed oil prices of $85 a barrel simply to preserve purchasing power realised in 2006.

That might be just enough of a uniting theme to get the group through its meeting on Friday without collapsing into a bickering stalemate.

Russia, Iran and Qatar – which have the world’s biggest natural gas reserves – on Tuesday raised the prospect of the creation of an Opec-style gas cartel.

“Today, a major gas troika was formed,” said Alexi Miller, chief executive of Russia’s Gazprom, after a meeting in Tehran.

The three countries agreed to establish a committee to evaluate joint projects ranging from exploration and transfer, to refining and sales.

Author: Jo Amey