Wednesday’s OPEC meeting was quite noteworthy. The headline news stories tell us that OPEC agreed to cut crude oil production by 520,000 barrels a day. The headlines won’t tell you that the ties that bind OPEC are unraveling at a wonderful rate for crude consumers. The addition of Hugo Chavez and Argentina’s emergence on the global oil market, combined with Russia’s re-emergence as one of Europe’s primary suppliers have created a rift within OPEC that seems to be widening. The political aspirations of the membership as well as their allegiances with non-OPEC nations are forcing the once cloistered group into open public confrontation.
Note the following excerpts from the Associated Press’ coverage of the meeting.….Behind the scenes, the 13-nation energy cartel juggled the conflicting interests of Saudi Arabia and Iran - and brought oil and gas giant Russia closer into the fold by agreeing to sign a cooperation agreement with the Kremlin.
However,…… "Russia does not want to be in OPEC because it means adhering to quotas which is not what Russia wants," she (Cornelia Meyer) said. "Russia does not want to comply with anyone's wishes but the Kremlin's."
Furthermore,…. Saudi Arabia's clout is key for Washington. President Bush visited Riyadh twice this year to push an oil production increase. The Saudis answered by ramping up production by about 500,000 barrels a day.
If we combine the above statements, with the following statements, from Douglas A. McIntyre from 24/7 Wall St. we can see that the primary information to take from these meetings is the impossibility of coexistence between a fractious OPEC combined with the differing agendas of new powers on the block, Argentina and Russia.
…Saudi Arabia walked out on OPEC yesterday. It said it would not honor the cartel's production cut. It was tired of rants from Hugo Chavez of Venezuela and the well-dressed oil minister from Iran.
As the world's largest crude exporter, the kingdom in the desert took its ball and went home.
As the Saudis left the building the message was shockingly clear. According to the New York Times, “Saudi Arabia will meet the market’s demand,” a senior OPEC delegate said. “We will see what the market requires and we will not leave a customer without oil."
Basically, ….”OPEC needs that for the Saudis to have any credibility in terms of pricing, supply, and the ongoing success of its bully pulpit. By failing to keep its most critical member it forfeits its leverage.”
Bill Siedman, market analyst and respected voice on CNBC, sees this dissent as a good thing. To paraphrase his comments, “There is no question that dissention within the oil cartel will lead to better price discovery of the true value of a barrel of oil. The Saudis are leading the dissent. They are the largest contributing member and have the largest oil reserves. They also possess the infrastructure to put these reserves on the market rapidly. They are, essentially, the leaders within the cartel. When push comes to shove, it’s their ball to call.The important thing to note from these meetings is that since 9/11 and Katrina, the U.S. and the world at large have been pushing alternative fuel technology. Even though our energy plan lacks coherence, the combination of the auto industry’s push towards fuel efficiency, the private sector’s growth of alternative power generation and academia’s funding surge channeled towards alternative energies are all effectively undermining the future power of petroleum.
The primary members of OPEC see the writing on the wall. They are using their petroleum revenues to diversify the economies of their countries. They are investing in infrastructure and technology at an unprecedented rate. Even though these processes take many years to develop, I believe we will be able to look back on this meeting, in the wake of $145 oil and say, “That was when it all started to unravel.”
