OPEC’s Family Feud

OPEC’s Family FeudOPEC’s Family Feud

When Venezuelan Oil Minister Juan Pablo Perez Alfonso resigned in 1963, he blasted the Organization of Petroleum Exporting Countries, at the time torn by internal rivalries, for failing to produce any benefits for his country.

Half a century later, OPEC is still split and Venezuela is again unhappy, this time at the unwillingness of the organization’s top producer, Saudi Arabia, to rescue oil prices from a six-year low that is dragging the battered Venezuelan economy into an even deeper crisis, Maher Chmaytelli wrote for Bloomberg.

On Sept. 10, Venezuela’s Oil Minister Eulogio del Pino tweeted appeals for OPEC and non-OPEC countries “to have a discussion on fair prices, minimum prices to ensure sustainability” and to “overcome our differences of opinion”.

Venezuelan President Nicolas Maduro said on Sept. 16 that he was making progress on organizing a summit of oil exporting countries to have that discussion.

OPEC member Algeria is backing the Venezuela-proposed conference as well as Maduro’s desire for a higher price. Venezuelan officials did not respond to requests for comment.

Maduro’s plans will not pan out unless Saudi Arabia stops flooding the market.

There is no sign Saudis will retreat from that strategy, which is helping it preserve and even gain market share.

“OPEC is of no use today,” says former Algerian prime minister Ahmed Benbitour. “The war now is about market share, not price, and Algeria is getting no benefit from this organization.”

  Saudi Influence

Venezuela and Algeria’s complaints raise the question of why some members stay in OPEC if the Saudis call the shots and ignore pleas for higher prices.

Neither Venezuela nor Algeria has made moves to quit. Not only is the group intact, but former member Indonesia is returning, boosting membership to 13 nations.

Of the 1.7 trillion barrels that remain to be extracted worldwide, 1.2 trillion, or 70%, are controlled by OPEC’s current members. Venezuela and Saudi Arabia hold 18%  and 16%, respectively, and Iran and Iraq 9% each, according to oil major BP. These four nations, with Kuwait, are OPEC’s founding members.

Pricing has often been a bone of contention, with Algeria, Iran, Iraq, Libya and Venezuela pushing for higher prices, a hawkish stand compared with Saudi Arabia and its neighbors Kuwait, Qatar and the UAE.

“Venezuela’s position within OPEC is to pursue a strategy of low production and high prices, since they can’t attract investments” to boost output, says Carlos Rossi, president of Caracas-based consulting firm EnergyNomics.

Persian Gulf Arabs are more inclined to accept a lower price to keep consumers hooked on cheap gasoline and thus extend the Age of Oil.

Saudi Arabia in particular is more likely to accept a lower price that preserves global growth and gives it influence far in excess of its actual economy.

  War Over Market Share

Instead of lowering output to prop up prices, as suggested by Algeria and Venezuela, Saudi Oil Minister Ali al-Naimi lobbied his OPEC counterparts in November 2014 not to yield market share to competing suppliers, including US producers of shale oil. Crude sank and trades at about $50 a barrel, half its level a year ago.

“What OPEC wanted to do is have a fresh look at the structural changes that have taken place in the oil market with the advent of US shale and other producers, who at a very high price were able to bring in fresh supplies that far exceed what demand called for,” says former OPEC secretary-general, Adnan Shihab-Eldin of Kuwait.

Algeria’s and Venezuela’s attempts to recruit non-OPEC producers to increase prices have been rejected by Russia and Mexico, two of the largest exporters outside the group.

The Mexicans say their focus is on restoring the productivity of their biggest field. Russia says it does not have the ability of some Persian Gulf producers to quickly raise or lower output because of the harsh winters and complex geology of its Siberian oilfields.  The International Energy Agency says Saudi Arabia is battling for market share and is driving higher-cost producers, such as US shale companies, out of business in doing so.

Non-OPEC supply is expected to fall in 2016 by the most in more than two decades as producers shut wells that cannot operate profitably with oil below $50 a barrel. Production outside OPEC will fall by 500,000 barrels a day, to 57.7 million, in 2016, the agency said on Sept. 11.

That is no solace for those in OPEC who are hard-pressed for cash. Fresh supply is likely to hit the market from Iran next year and oil prices could drop to as low as $20 a barrel, Goldman Sachs said earlier this month.

Saudi Arabia’s production of about 10.5 million barrels a day is its highest ever and the kingdom still has spare capacity of more than a million barrels.

Other OPEC members are pumping less oil, as projects to bring fresh crude to the market were derailed by political or social unrest. Venezuela is producing 2.5 million barrels a day against a peak of 3.7 million barrels in 1970. Algeria and Nigeria are in similar straits.

  Vulnerable Members

Those three nations, plus Iraq and Libya, are the OPEC members most vulnerable to political turmoil, as cheap oil hammers their currencies and weakens their ability to sustain social subsidies.

“OPEC is like a family where the children quarrel but can’t do without each other,” says Karin Kneissl, a Vienna-based university lecturer on energy politics. “They know they are better off talking to each other to preserve the common, long-term interest; even those who left long to return if they can.”

Indonesia voluntarily suspended its OPEC membership in 2009 as its production declined to the point that it had to import oil. Indonesia still pumps oil for its domestic market. It will return officially on Dec. 4 as the first member that is not a net oil exporter.

“The benefits from staying with the group outweigh by far the cost of membership,” says Hasan Qabazard, chief executive officer of Kuwait Catalyst and former head of research at OPEC.

“Getting firsthand access to market data, research and information that may affect the market” could be the motivation behind Indonesia’s application to return.

“I don’t see OPEC falling apart,” says Fayyad al-Nima, Iraq’s deputy oil minister for extraction.

And Venezuela’s reason for sticking with the group? Says Carl Larry, head of oil and gas for market researcher Frost & Sullivan: “It’s either stay with OPEC and tag along, or leave OPEC and be by yourself.”