Global Policy Forum

The Political Hydraulics of OPEC

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By Tom Hundley

April 13, 2010

 

 

OPEC is a maddeningly opaque outfit; its public pronouncements frequently seem carefully crafted to conceal its private calculations.

The 12-member cartel controls about one-third of the world's daily oil supply - not quite enough to give it absolute control over the price per barrel, but enough to allow it to consistently manipulate the price to its advantage.

Its imposing headquarters in Vienna and the refined (if somewhat oily) manners of its delegates are at odds with the corrupt, violent, repressive and often plain crazy political environment that is the norm for most of its member states.

And now the world watches as this highly effective but oddly dysfunctional gang deals with the elephant in the room.

The elephant, of course, is Iraq and the fistful of deals it has finalized over the last few months with some of the world's largest oil companies.

Iraq anticipates that these deals will boost output over the next seven years from the current level of 2.4 million barrels per day (bpd) to something between 10 million or 12 million bpd. Along the way, Iraq would zoom past its meddlesome neighbor and rival Iran as the No. 2 producer in OPEC (4.1 million bpd) and eventually challenge the Saudis, currently producing about 10 million bpd, for the No. 1 spot.

If all of that happens - a very big "if" given the uncertain state of affairs in Iraq - it would not only upend the pecking order in OPEC, it also would cast the region's geopolitical balance in an entirely new light.

"Iraq is a problem for everybody," said Giacomo Luciani, an oil industry scholar with the Dubai-based Gulf Research Center. "But at the moment, this is all very speculative. We don't know what demand will be in five years, 10 years, and we don't know to what extent Iraqi production will increase."

For its part, Iraq has been sending very mixed signals. On the one hand, there is all the talk of quadrupling production in seven years; but in March, ahead of OPEC's most recent gathering in Vienna, Iraq's Oil Minister Hussain Shahristani said Baghdad would be willing to discuss production quotas with its OPEC brethren once its own production hit the 4 million bpd level.

One of OPEC's founding members, Iraq has been excused from the organization's quota regime for many years. That's because it has yet to recover from the sharp drop in production that followed the Iraq-Iran War and continued through two more wars and a decade of sanctions.

Historically, OPEC has set quotas for Iraq and Iran at approximately the same level - this based on their proven reserves. But Iraq now believes it should be treated as an equal to Saudi Arabia.

If Iraq can actually deliver that much oil, it would challenge Saudi dominance as OPEC's "swing producer"- the one mega-producer that can tweak the global price of oil by adjusting the spigot of its own production.

The Saudis do not seem overly troubled by this prospect. They apparently share the view of many analysts that quadrupling production in the space of seven years is easier said than done.

"I think that some of these oil companies have overstated how high they can take Iraq's oil production," said Kristian Patrick Alexander, a political scientist at Abu Dhabi's Zayed University.

Among the factors that could slow the Iraqi project, Alexander mentioned the likely eruption of violence, especially with U.S. troops scheduled to complete their withdrawal by the end of 2011; the absence of a comprehensive oil law guaranteeing the legality of the deals with foreign companies; rampant corruption; a lingering dispute over control of oil fields in Kurdistan and, finally, the decrepit state of Iraq's overall infrastructure.

"The projections [of 10 million to 12 million bpd] are somewhat optimistic," he said.

If the Saudis can afford to take the long view of Iraq's reintegration into OPEC, Iran can't.

"Iran is much more vulnerable to declining prices and declining revenues. Saudi Arabia just doesn't need the money to the same extent," said Luciani, the industry analyst.

Even if its oil output is surpassed by Iraq, Iran would remain the dominant political and military power in the Gulf. But being out-pumped by Iraq is likely to make Tehran feel an even greater urgency to develop its nuclear capability in order to maintain its status.

The key player may turn out to be China, the world's No. 2 energy importer. The Chinese are heavily dependent on Iranian oil and, as a result, Beijing for years has tried to shield Tehran as much as possible from the economic sanctions the U.S. and its allies would impose.

But that is changing. Now that the China National Petroleum Corporation has signed a major deal with Iraq, Beijing is signaling a new willingness to consider sanctions. And with the encouragement of the Obama administration, Saudi Arabia and other Arab oil producers are giving the Chinese quiet assurances that they will cover any decline in Iranian production resulting from sanctions.

All of this is bad news for the government in Iran, where any drop in oil revenue will make it increasingly difficult for an unpopular regime to hold on to power.

 

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