There is an enduring debate within political theory over the nature of institutions in the geo-political arena – vehicles for mutual cooperation or ‘smokescreens’ for state self-interest?
The market pressure applied on OPEC states has generated different responses (dependant on individual economic circumstances) with the current situation seeming to reflect an overriding desire for Saudi to protect its market share, even at the expense of other producers.
[Scene set: A dusty Middle American style town in the mid – 1800s, saloons and boardwalks on the sides of the screen. As the dust settles, two figures appear wearing Stetsons with Colts holstered in their belts, hands on the grip.]
Maduro: “You’re from Saudi? Tell Al-Naimi I want to live in peace, that it’s no use to go on tormenting me. If he’d listened we could have avoided this. I just want to cut production and make the prices go up again.”
Al-Rabiah: “Word’s around you had a visitor. And Al-Naimi knows it. Name of Novak. Well?”
Maduro: “Novak was here.”
Al-Rabiah: “Maybe Al-Naimi would like to know just what you and Novak had to say…about the oil production.”
OK, we admit, that’s been given a little artistic licencing as we imagine what has gone on in the past few days in the world of OPEC. But something significant has happened.
Last Wednesday the Venezuelan Oil Minister Eulogio Del Pino said that OPEC and non-OPEC producers needed to reconsider their current plan of action, believing the focus should be on supporting prices rather than limiting volume. It’s a nice spin on a move which would take the world’s oil producers down a completely different path from the one they chose last November.
Of course since November 27 2014 OPEC has toughed out the continuing slump in prices, some 50% down on what they reached in July 2014. But the clamour for change, which was in the background at that meeting, is now apparently coming to the fore. Naturally Venezuela which gets 95% of its export earnings and 25% of GDP from oil is one of the main protagonists calling for the group to show some flexibility. It has felt the pressure more than Saudi Arabia which devised the 2014 strategy to compete for market share against US shale producers rather than support prices, although it’s been borrowing money in recent times to pay for the Kingdom’s generous state subsidies for citizens which suggests it too is feeling the pinch.
Hence the call then from the Venezuelans for an urgent meeting to discuss potential attitude adjustments. Pino said the country sought a fair price for economic growth and energy demand, with President Nicolas Maduro arguing, “The minimum, minimum price should be $70.”
However a Saudi official told Reuters it was unnecessary to interfere with the oil market and a meeting with no concrete outcome would “backfire” and only negatively affect prices. Russia too said on Wednesday that it had rejected the request to cut oil output. “We believe that any artificial reduction will not bring any good, quite the contrary – it exacerbates the situation in the future,” Energy Minister Alexander Novak told reporters. “That is, in the short term this could have an affect but in the long term – no.”
But then 48 hours later – deputy Energy Minister Alexei Teksler said, “If the price falls below $40 pb then we, most likely, would be faced with a production decline.” This from the country that had previously said even if prices fell to below $30pb it would not deliberately cut production. Brent crude dipped below $49pb on Friday.
While this is not being viewed as an early signal of policy shift it is certainly an unexpected adjustment. Russia has produced more oil in the past year than anyone thought would happen, so even this mere admission of possibility is intriguing. Add to this the statement from Kazakhstan that its oil output could fall by a tenth in 2016 if prices hit $30pb and the support for Maduro’s plan appears to be consolidating from previously hostile producers.
The next move may depend on what Al-Naimi prefers less – losing control of OPEC or cutting production.