Opec talks in Vienna rancorously broke down last Wednesday. "We were unable to reach an agreement--this was one of the worst meetings we have ever had," Ali al-Naimi, oil minister for Saudi Arabia, Opec's biggest producer, told Reuters. And these statements shouldn't be taken lightly, because they mark out the future rules of engagement. This year, The New York Times reports, tension increased between Saudi Arabia and Iran, both competing to catch up with and shape volatile regional events, particularly in tiny Bahrain, where more than 1,000 Saudi troops are supporting a Sunni monarchy against mostly Shiite protesters supported by Iran. And every response and counter response has growing symbolic weight: the proxy for the lingering fallout of the Iraq and Afghanistan Wars.
Saudi oil minister, Ali ai-Naimi
Saudi Arabia and Iran lobbied aggressively
Iran, which holds the revolving OPEC presidency this year, successfully blocked Saudi efforts to raise official production quotas. This involved intense lobbying by both countries, because the United States had put pressure on Saudis to deliver a credible deal to cap crude prices to prop up slowing economic growth; but Iran needed the added revenue, and still felt the humiliation of the Green revolution, the sting of tightening sanctions, and acrimoniously assumed that the US was involved in the stealthy Stuxnet attack which, at least temporarily, crippled the Iranian enrichment program.
The balance of power shifted As the only member that has sufficient spare capacity, Saudi Arabia is easily the largest exporter in OPEC. This production muscle normally allows the Kingdom to get its way. But during the heated political debate, Saudis struggled to try to dominate the meeting. Temporarily, the balance of power shifted away as Iran flexed its own diplomatic muscle, finding allies like Venezuela, who has been miffed at the the US for years. This caused global reverberations, making oil markets jittery about the eventual, but by no means obvious, outcome. Saudi's Naimi said OPEC's four Gulf Arab countries had proposed the 12-member group increase output by 1.5 million barrels a day to 30.3 million barrels a day, including Iraq which is not bound by an OPEC quota. But this time those politically opposed to the United States--in particular Iran and Venezuela--found enough support to block Riyadh. Ironically, since many countries, including Iran, are already exceeding the quotas, it was largely a symbolic slap. Saudi Arabia was left isolated by a majority--Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran--who wanted to keep production unchanged. (Nigeria remained neutral). Iran said that supplies were adequate for the time being. "Iran believes there is no shortage of supply," acting Oil Minister Mohammad Aliabadi told Reuters. In a report from the Associated Press, the Iranian oil minister speaks (video above).
Rising demand from China
The Saudi newspaper Al-Hayat reported on Friday that Saudi oil officials had decided to increase production to 10 million barrels a day in July, from 9.3 million barrels, with most of the additional output going to China. Stepping outside OPEC was not unexpected. After the unruly meeting, Saudi Arabia decided to go it alone. Participants and analysts viewed the decision as a slap at Iran, showing that Saudi Arabia still remained the most powerful OPEC member--inside or outside the cartel.
Still, there is only so much Saudi Arabia can do in a tightening world market. The country has an estimated spare production capacity of 2.5 million to 3 million barrels a day. This is a thinning cushion as violence spreads in area of the Middle East and oil consumption grows. The fighting in Libya has taken 1.3 million barrels off the world market, and the turmoil in Yemen and Syria has subtracted an additional 300,000 barrels. China, the world's largest oil importer, purchased 876,000 more barrels a day this May compared to last year. OPEC has estimated that global demand would rise by 2.5 million barrels a day in the second half of the year, reaching a level higher than current OPEC production and implying a draw in inventories.