Politics back with a vengeance at Opec

Failure at Vienna shows Saudi Arabia’s grip slipping

I was wrong. Politics have returned to Opec with a vengeance.

Over the last decade, the cartel, which accounts for 40 per cent of global supplies, had successfully separated politics from the business of managing oil supplies.

But that achievement suffered a setback on Wednesday after Opec failed to agree an increase in production in spite of oil prices above $100 a barrel. Ali Naimi, Saudi oil minister and the group’s de facto leader, likes to say that the cartel is a “technocratic” group whose members focus on oil supplies, demand and revenues rather than on domestic politics. Or rather, it “was” a technocratic group. After the meeting in Vienna ended without agreement, a frustrated Mr Naimi said: “This is one of the worst meetings we have ever had.”

The return of politics to Opec has much bigger implications than the failure of Wednesday’s meeting. It signals that for the first time since 1998, Saudi Arabia no longer has de facto control over the cartel’s direction. Mr Naimi, who wanted a big increase in production, was only able to command the support of fellow Gulf countries Qatar, Kuwait and the United Arab Emirates in Vienna.

As such, consuming countries can no longer expect Opec to follow Saudi Arabia’s more moderate price policy. Moreover, it also signals that a majority of the cartel’s members sees crude oil prices significantly above $100 as a new floor, rather than a price ceiling.

The return to politics wipes out more than 10 years of progress. After Saudi Arabia, Venezuela and Iran sat down in 1998-99 to set the basis of their new relationship in a series of meetings in Madrid, Riyadh and The Hague, Opec became more business-like and less political.

The separation between politics and oil management did not mean that all Opec members agreed on everything all the time. Iran and Venezuela continued to support higher prices than Saudi Arabia. But that was largely because of domestic reasons rather than an attempt to hit western economies. And Riyadh’s defence of (slightly) lower prices was not due to any altruism in favour of the US, Europe, Japan and China, but rather a conscious attempt to keep prices low enough not to damage the global economy – and, therefore, demand for energy.

Why has more than 10 years of progress evaporated? For sure, the political climate in the cartel is probably the worst it has been in years. The relationship between Saudi Arabia and Iran has been soured because of Riyadh’s military support for Bahrain’s rulers. Libya is split by the rebellion against Col Muammar Gaddafi’s 42-year rule, with Qatar and the UAE supporting the rebels.

But the problem goes deeper than that, and is related to oil revenues. The hawkish camp needs much higher prices than it did over the last decade to survive economically. Venezuela, Iran and their allies need oil prices above $100 to balance their budgets after years of expansionary policies, generous subsidies and rampant military spending.

The return of politics to Opec could also see the return of the International Energy Agency to the day-to-day workings of the oil market. The western countries’ oil watchdog told the cartel ahead of the meeting that there was an “urgent and clear” need for higher production. It also made clear it was ready to use all the tools at its disposal – a thinly veiled reference to the release of strategic stocks – if Opec did not boost output. Opec failed to do so. The IEA may yet bring another set of politics into the oil market.


(This article was amended at 1630BST)

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