In spite of all the skirmishes between the Opec oil producers’ cartel and western countries about high prices, relations between consumers and producers have been much smoother in recent years than during the confrontational period of the late 1970s and early 1980s.
But the oil market now faces the risk of a return to the old days. Over the last decade, the International Energy Forum has patched up differences between Opec and western countries, particularly since meetings in Riyadh in 2000 and Osaka in 2002 set the foundations for stronger consumer-producer dialogue.
Although never publicly acknowledged, consumers and producers at the IEF reached a tacit understanding for what might be called the “Goldilocks” oil price: not too high to damage consumers and derail economic growth (that is, not above $80 a barrel), but not too low to hit producing countries and prevent investment in future production capacity (not below $60 a barrel).
In essence, the IEF tried to minimise the so-called “blame game”, where consuming and producing countries attributed high oil prices to each other’s policies. As Bassam Fattouh and Coby van der Linde noted in their book about the consumer-producer dialogue, “the realisation arose that this blame game and provocative remarks from both parties often exacerbated existing market volatility”.
With oil prices above $100 a barrel, however, the blame game is back. The dialogue between consumers and producers is under threat.
The International Energy Agency last week fired a shot across Opec’s bows, telling the cartel that ahead of its June 8 meeting there was an “urgent need for additional supplies on a more competitive basis to be made available to refiners”.
Moreover, the western countries’ oil watchdog told Opec in a thinly veiled warning that it was “prepared to consider using all tools at the disposal of IEA member countries” – code for a release of strategic stocks.
The IEA has rarely used such an explicit warning over the last decade. Lawrence Eagles, head of oil research at JPMorgan and a former senior official at the IEA, perfectly encapsulated the moment in a note to clients headlined: A return to the oil politics of the 1970s?
The warning broke with the consensus built over the past 10 years between the IEA and Opec. Both have tacitly agreed the cartel would first respond during a supply crisis and the IEA would only release its strategic inventories as a second, and final, option. Of course, it could be argued that since Opec has yet to replace lost output from Libya, the IEA is only right to threaten the use of strategic stocks.
Opec has also contributed to the return of the blame game. After the IEA’s chief economist told the Financial Times earlier this year of his concerns about the effect of $100-plus prices on the global economy and urged producers to pump more oil, Abdalla El-Badri, Opec secretary-general, opted for strong language, saying that “any assumption that there is tightness in the market ... is incorrect”.
He added: “Supplying the world’s media with unrealistic assumptions and forecasts will serve only to confuse matters and create unnecessary fear in the markets.”
If the blame game and provocative remarks continue, consumers and producers can only expect to see a repetition of 2005-08: higher and more volatile prices. So far, there are no signs that either side is ready to yield.