IT was a sharp tactical move. While OPEC was in session, the 1960s style building in Vienna, crammed with analysts and energy pundits, was already abuzz with the political ramifications in case OPEC went ahead with any further output cut last Sunday evening. Had OPEC opted for further cuts, with grim economic reports pouring in from all around, it would definitely have ruffled feathers in the industrial world. The grouping would have re-emerged as the favorite whipping boy — the one responsible for destroying the global economy.
“We just don’t want to add more problems to what is going on — things are really getting ugly,” conceded Abdallah El-Badri, OPEC’s secretary-general, while explaining the decision to the eager audience. A new cut threatened a price increase and that could harm the economy, Saudi Arabia’s Minister of Petroleum and Mineral Resources Ali Al-Naimi conceded bluntly.
Indeed, politics had a role in the decision making process that evening. But in no way was pure economics far behind.
In the run up to the OPEC moot, President Barack Obama had a telephone conversation with Custodian of the Two Holy Mosaques King Abdullah on the need to coordinate the global response to the emerging economic crisis. For the grouping to appear playing hardball at this stage would definitely have soured its emerging rapport with the new administration at the world’s largest crude consumer.
Underlining that the weakness of the global economy was the central motivation behind the OPEC decision, El-Badri clarified: “I don’t want to say I voted for Obama, but we can see a different tone ... that we didn’t see in the past. We have seen a positive approach. They are ready for dialogue and we are ready for dialogue.”
And the OPEC move effectively provided a financial stimulus in the form of cheaper oil. The new US Energy Secretary Steven Chu thus welcomed the outcome, declaring he was pleased with the output decision.
The OPEC decision needs to be seen and appreciated from the perspective that it was formulated despite swelling inventories and prices still considerably lower than the OPEC target. By extending the olive branch, OPEC thus appeared to be contributing to the lowering of the temperature. The decision deferring new supply cuts at least until May 28, the date of the next meeting, laid the ground not just for cheaper oil to help heal the global economy, but also for warmer relations with the world’s biggest energy consumer.
However, there was an economic perspective to the entire debate, too.
Sheer self-interest meant the group needed to avoid the kind of damage to growth that would only further limit energy consumption.
“At the moment, getting the world back on its feet is more important than lifting the oil price by a further $10 a barrel,” says Lawrence Eagles of JP Morgan. “The world economy is crucial. Short-term gain would be to the long-term detriment of OPEC.”
With OPEC not in mood to earn the wrath of the industrial world, this time at least, it went as per the expected. Then there was another catch: If OPEC could somehow comply still more with the earlier announced output cuts it could definitely tighten the markets further without ruffling feathers. And people in that Vienna room realized that there was definitely a room for such maneuvering indeed.
OPEC still needs to trim about 800,000 barrels a day to comply fully with the record output reductions decided earlier. Global inventories have started to fall, indicating the policy is working. Crude oil production target for 11 OPEC members bound by quotas is 24.85 million barrels a day, while actual output from those countries averaged 25.715 million barrels a day in February, an OPEC report published on March 13 said citing data from secondary sources including analysts. That means the group had complied with 79 percent of its promised reduction. And more could be done!
Saudi Arabia has trimmed more than it agreed to and as of February had implemented 46 percent of the overall cuts of about 3.4 million barrels per day. The UAE and Kuwait have kept their full commitments, according to figures provided by Washington-based consultants PFC Energy. At the other end of the spectrum, Iran’s compliance in February was said to be only 33 percent. The second-largest OPEC producer is only contributing 6 percent of the cuts, the Washington-based PFC says. Venezuela’s compliance is also only about 50 percent. In fact the PFC says that Al-Naimi recently sent a letter to OPEC, urging all members to comply fully.
The emphasis thus moved to full adherence. “Now it is time to fully adhere to the cuts we agreed upon,” Qatari Oil Minister Abdullah Bin Hamad Al-Attiyah underlined after the meeting, echoing the observations of the Secretary General.
Analysts agree it will be difficult for OPEC to achieve significantly higher prices anytime soon, and that a big jump to OPEC’s last-year target of around $75 per barrel would be destructive — even if it could be achieved. OPEC knows well that for long-term economic health, prices need to be high enough to sustain investment in new production. However, in the nearer term, it is resigned to allowing a weaker oil market. It has adopted a safer, more pragmatic and yet an agonizing approach.
