Do Recent Squabbles Signal the Demise of OPEC?
After OPEC wrapped up one of the most heated meetings in its recent memory, some are wondering (maybe hoping?) if the high-profile dissension hints at a collapse of Americas least-favorite oil cartel.
Squeezed by political unrest sweeping the Middle East and a U.S. economic recovery that may be stalling, OPEC is undoubtedly under intense pressure. The inability this week to come to a consensus on boosting production and the meeting's awkward aftermath is calling into question the groups credibility and thus, its very ability to influence prices.
But dont get your hopes up; OPEC isnt likely to break up. Over the years, the cartel has shown a remarkable ability to weather these storms and -- for now at least -- appears likely to emerge from its most recent squabbles intact.
Its in their self-interest to continue to at least masquerade as a cohesive group, said Tom Kloza, chief oil analyst at the Oil Price Information Service.
Awkward Meeting
Speculation about the future of OPEC, officially the Organization of the Petroleum Exporting Countries, began to swirl after the oil cartel surprised the world this week by failing to agree to hike production to fend off triple-digit prices.
In the first meeting since the Arab Spring erupted, Saudi Arabia, Kuwait, Qatar and the United Arab Emirates called for raising production by 1.5 million barrels a day, to 30.3 million barrels. They reasoned that demand is expected to pick up later in the year and elevated oil prices threaten to derail the economic recovery.
They recognize they dont want to provide the last straw that tips the macroeconomic situation into no growth or recession, said Kloza.
Six members blocked that Saudi proposal, led by the groups biggest problem child, Iran. Many of the countries that voted against a production hike are relying on the higher oil revenues to soothe angry populations. Some may also have reached their max production levels.
In the aftermath of the awkward meeting, crude oil climbed nearly 2% to almost $101 a barrel and Saudi oil minister Ali Naimi declared it one of the worst meetings we ever had.
OPEC Feels the Heat
While OPEC is clearly under pressure, it has survived more than a handful of skirmishes, including the Six-Day War between Israel and Egypt, the Iranian revolution in 1979 and the first and second Gulf wars.
I think weve seen this play before, said Richard Sylla, an economics professor and financial historian at NYU.
Created in 1960, OPEC is comprised of 12 countries, including Iraq, Libya and Venezuela, which is run by anti-American dictator Hugo Chavez. The group is currently chaired by Iran, whose president has called for the extinction of Israel.
While OPEC doesnt include several major oil producers, such as the U.S., Canada and Russia, the group still carries serious weight. It meets throughout the year in an effort to control the worlds supply and demand of crude oil, which is the lifeblood of the global economy.
Its extraordinary its held together over all of these years, said Sheila Hollis, a partner at Duane Morris and a former official at the Federal Energy Regulatory Commission. Theyve been through a lot of ups and downs and tough times. This is going to press it to the limit.
Thats because the current crisis directly involves and seriously threatens several of OPECs members. Libya, the largest African oil producer, is in turmoil as NATO bombs the regime of Muammar al-Qaddafi. Iran has seen increased political unrest and the Saudi kingdom has attempted to soothe its population by promising $130 billion in government handouts.
Whenever there are perturbations in the Middle East, youre going to see these inter-OPEC battles, said Hollis. This very serious because so many countries are pulled into it in a more direct way.
OPEC Unlikely to Crumble
Of course, OPEC countries frequently flout the groups decisions, leaking extra supplies or inflating the number of barrels of crude they have produced.
There are plenty of charades and gamesmanship and nonsense, said Kloza. They never actually cheat. Its always leaking. Its kind of like Niagara Falls is leaking over the topography."
In fact, hours after this weeks contentious meeting broke up in Vienna, reports swirled that the Saudis plan to boost supplies anyway, increasing production by up to a million barrels a day to well beyond their stated quota of eight million barrels a day.
"It makes me start to wonder, why does anyone want to be in OPEC anymore? Dominick Chirichella, an analyst at the Energy Management Institute told The Wall Street Journal. Why pay the millions in dues and go to these meetings where the decisions don't even matter?"
Of course, few would argue these oil-rich regimes cant afford to pay their dues.
And despite the current tensions, an all-out break up of OPEC seems unlikely unless there is a serious escalation of the political unrest in the Middle East that threatens to topple the Saudi kingdom.
Thats because its still in the member nations best interests to conspire to maximize oil profits and maintain the worlds appetite for crude oil.
The motivations for them to have this quasi-cartel are the same now as they have been historically, said Krista Schwarz, a finance professor at Wharton School.
Waning Influence?
Thats not to say all is well for OPEC.
Schwarz said the failure to reach a consensus this week on boosting production certainly damages their credibility. She likened it to the need for the Federal Reserve to maintain its credibility to fight inflation, adding, an organization and the announcements they make are only as good as the actions they take.
There are also signs OPEC is not quite the force it once was.
In slow times, the group is still able to easily to boost prices when they are low by simply turning off the spigots. Yet OPECs ability to prevent the oil markets from overheating has been compromised by the rapid growth of emerging markets and the popularity of crude as a form of speculation.
I think their ability to temper runaway prices has decreased, said Kloza. Its the growth of the population and the movement of a billion people in the next generation into middle class that works against their ability to temper the enthusiasm among investors and the higher prices.
The inability to keep a lid on oil prices could create a serious long-term problem for OPEC. Thats because at a certain oil price, alternative energy sources like solar and wind power become more economically viable and the calls for increased oil drilling in the U.S. grow louder.