Defeated; humiliated; overpowered… Saudi Arabia appeared to come out from the last meeting of the Opec oil cartel as the loser after it failed to get backing for its proposal to boost output, with its opponent Iran victorious.
Yet two months later Riyadh is proving that first impressions are often misleading. If someone was defeated, it clearly was Tehran.
Since the June 8 Opec meeting in Vienna, Saudi Arabia has boosted unilaterally its crude oil production, reaching la 30-year high of 9.8m barrels a day last month. At the same time, Iran’s own oil output has plunged to its lowest level in more than 8 and a half years at 3.5m b/d, according to fresh estimates by the International Energy Agency.
Tellingly, the last time that Saudi Arabia was pumping as much crude oil as it did in July was in early 1981, when the kingdom was replacing the production lost after the Iranian revolution and the start of the Iran-Iraq war.
Saudi Arabia has, in fact, transformed the apparent defeat at the Opec meeting into a double-win.
On the one hand it is cashing in on near-record monthly revenues as it sells lots of oil at prices of about $100 a barrel. On the other, it has gained rare political praise from consuming countries such as the US, Europe, China and India as it positioned itself as the moderate voice within the Opec oil cartel.
Iran, on the other hand, is now trying to catch up. Rostam Ghasemi, the military commander who is the country’s new oil minister, talked about the country’s important role within the cartel due to its high hydrocarbon reserves.
“Saudi Arabia is not the whole Opec. Iran and other Opec members should play a role in Opec with more cooperation and more convergence,” he said.
The truth is, however, that Iran and its ally Venezuela have given Saudi Arabia extra power. By not investing nearly enough in new oil production capacity, both countries have seen their maximum sustainable output level falling over the last decade.
Venezuelan oil output peaked in mid 2009 at 3.0m b/d; today it is down to 2.5m b/d in spite of record demand and high prices. Iran is similar: output peaked at 4.2m b/d in mid 2006; today it has fallen to 3.5m b/d. As they are unable to boost output, Caracas and Tehran have favoured relatively low Opec output and higher oil prices.
Riyadh, instead, has spent billions of dollars in new oil fields and its maximum production capacity has steadily risen over the last decade. Today Saudi Arabia could boost its production further to more than10m b/d, potentially up to 12.5m b/d.
As Paul Horsnell, the veteran oil watcher at Barclays Capital notes, when it comes to production increases “Saudi Arabia is the world’s sole swing producer, giving it a level of control not seen since the heights of Opec in the 1970s”.