Next month’s Opec meeting will take place against a background of dissension between two power blocs in an organisation that controls the lifeblood of the global economy, reports Andrew Critchelow.
A secretive group of the world’s most powerful oil ministers will soon gather in Vienna to take arguably one of the most important decisions that could affect the still fragile world economy: whether to cut production of crude to defend prices at US$100 per barrel, or keep open the spigots as winter looms among the biggest energy-consuming nations.
A sudden slump in the price of crude has exposed deep divisions within the Organisation of Petroleum Exporting Countries (Opec) ahead of its final scheduled meeting of the year next month to decide on how much oil to pump.
Some members, led by Iran, have called for immediate action to stem the drop in oil prices, while the Arab sheikhdoms of the Gulf have so far argued that it could be another three months before it becomes clear whether the group should cut production for the first time since December 2008. Whatever they decide, oil remains the lifeblood of the global economic system due to its direct impact on inflation and input prices.
In the US – the world’s biggest consumer – crude for November delivery at one point last week dropped below the psychologically important US$90 pricing level, raising fears that a prolonged slump could put many of America’s shale drillers out of business. Shale oil, which can cost up to US$80 a barrel to produce, has spurred an energy revolution in the US, which has started to threaten the dominance of producers in the Middle East.
However, at current price levels many of these new so called “tight oil” wells are approaching the point when they will soon become unprofitable.
All eyes are now firmly focused on the next move by Opec, which controls 60 per cent of the world’s oil reserves and about a third of daily physical supply. The group has been branded an unaccountable “cartel” by free-market critics in North America who claim its system of limiting production by setting an output ceiling and quotas is tantamount to price rigging.
Although this is an accusation that the group’s secretariat, which is based in Vienna, strongly denies, its mostly unelected group of policymaking oil ministers undeniably pull the strings of the global energy industry in the same way that central bankers can control currencies.
Opec states have largely managed to maintain cohesion over the past decade as prices over US$100 a barrel have enriched their economies and encouraged adherence to quotas. This consensus is now starting to break down.
Next month’s meeting promises to be the most tense held since the onset of the Arab Spring in 2010, with the Shi’ite Muslim faction of Iran and Iraq already appearing to line up against Saudi Arabia and the United Arab Emirates (UAE).
Iran’s Oil Minister Bijan Zanganeh has placed his cards on the table early by calling for Opec to urgently cut output to stem the sharp recent decline in prices, which threatens the Islamic Republic’s fragile economy after years of restrictive sanctions.
According to research from Deutsche Bank, Iran has the highest fiscal break-even price for its budget at over US$130 per barrel of Brent, compared with the UAE at around US$70 per barrel and Saudi Arabia at about US$90.
However, the Gulf’s Arab states are all sitting on huge cash piles that are held overseas through sovereign wealth funds and foreign currency assets that can be drawn upon to help them weather any short-term drop in oil export revenues.
Full article: World on brink of an oil price war (NZ Herald News)