OPEC and Oil Prices: The Abu Dhabi Meeting in Context
Now that the OPEC summit public-relations exercise of November 17 is over, all eyes are fixed on the upcoming OPEC oil ministers meeting in Abu Dhabi, the capital of the United Arab Emirates, on December 5. Consumer nations, particularly the United States, have called for OPEC to boost production as a way of bringing down crude oil prices, which crossed the US$99 per barrel mark during intraday Asian trading on November 21.
Energy markets are in a nervous state. Insufficient spare capacity in producer nations, sky-high demand from growing Asian economies, speculators’ anxieties over geopolitical tensions and a weaker US dollar have combined forces to push crude oil spot prices into the US$90-$100 band, while futures prices (for delivery in 2008, for example) are in the US$80-$90 range. The International Energy Agency forecasts that crude oil demand will rise from 85 million barrels per day (MMbpd) to 116 MMbpd by 2030. Meanwhile, production is declining in many traditionally reliable fields, such as the North Sea or Mexico’s Cantarell. Those nations that can boast healthy reserves have seen a resurgence of resource nationalism manifested mainly in the form of government re-negotiations of exploration contracts to the detriment of international oil companies (as has been seen in Russia, Kazakhstan and Venezuela). Meanwhile, Petrobras’ discovery that Brazil’s offshore Tupi field may hold up to 8 billion barrels of crude oil has done little to dampen prices, as it will be many years before this oil is brought onstream.
Within OPEC, the debate on pricing is usually a bilateral one with price hawks, such as Iran and Venezuela, often prioritizing higher short-term prices, while the organization’s dominant member-state, Saudi Arabia, views its interests as being in a stable and growing demand-side, and thus chooses to moderate demand spikes with its spare production capacity. The concomitant benefit is that Saudi Arabia is recognized as the most important crude oil producer in the world, if for no other reason aside from the fact that it is the only OPEC member-state with “swing” capacity, estimated to be 1-2 MMbpd.
Consumer nations are concerned about “supply security,” i.e. the ability of OPEC to provide stable and sufficient quantities of oil and natural gas to the world market, ideally at a reasonable price. Producer nations, however, are wary about sinking millions of dollars into production expansion schemes without being reasonably certain of stable world demand. This concern for “demand security” has grown as politicians speak of “energy independence” and “weaning off Persian Gulf oil.”
Consumer nations maintain that the only way to significantly bring down prices is by boosting production quotas, however OPEC member-states assert that oil market fundamentals remain healthy. Crude prices fell November 21 as traders noted the healthy build-up in inventories at the main US delivery point in Cushing, Oklahoma. Furthermore, the Federal Reserve cut its forecast for 2008 US growth citing the credit squeeze and weak housing market, thus resulting in lower forecasted demand for oil in the world’s largest crude consumer. Most observers consider the recent spiral in oil prices towards $100 a reaction to the weakening US dollar, as the greenback is 44% weaker against the euro since the last OPEC head of state summit in 2000. Consequently, the price of oil has adjusted to reflect the relative decline in value of the dollar, although the long-term supply picture is admittedly not a rosy one, as the recent NPC report and IEA forecasts have indicated.
Saudi Arabia has traditionally been able to get its way in OPEC;observers recollect the OPEC meeting in September, where the Kingdom was able to successfully lobby on behalf of a 500,000 bpd annual production increase; but the upcoming gathering will once again reveal differences between the two price “camps” who have to balance concerns of supply and demand security.
Saket Vemprala covers energy issues at the Gulf Institute. He is a graduate of the M.A. Security Studies Program at Georgetown University, and has previously worked in geopolitical risk consulting, as well as at the United Nations.