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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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How Washington Could Spoil The OPEC+ Alliance

OPEC and Russia are officially working to establish a formal alliance that would allow for the indefinite management of the oil market.

The OPEC/non-OPEC coalition, often referred to as “OPEC+”, has presided over two rounds of production cuts since early 2017. The deals were one-off affairs, viewed as temporary emergency measures to erase a painful glut of supply that was draining the coffers of all oil producers alike.

But why not make the partnership official? The Wall Street Journal reports that such negotiations are underway. This is not the first time we have heard about a formal OPEC+ partnership. Last year, the two sides, led by Saudi Arabia and Russia, discussed such an eventuality, but ultimately backed off.

The idea of a formal OPEC+ architecture has an obvious logic. Together, OPEC+ controls over 40 percent of global oil supply. Combining their production volumes to tweak output levels here and there in order to achieve stability – or, rather to obtain a desired price level – is much more easily achieved by coordinating their actions. They are stronger together rather than apart.

Moreover, the idea of a formal alliance has been predicated on the strengthening of strategic ties between Russia and Saudi Arabia. The two governments have grown closer over the past few years. The Saudis see the upside of moving closer to another global power, particularly after they grew suspicious of the U.S. government following the 2015 Iran nuclear deal. Related: Mozambique LNG Increasingly Appealing For International Players

From Moscow’s perspective, they can peel off an American ally and strengthen their position in the Middle East. There are also growing economic ties between the two countries aside from the oil sector.

Nevertheless, managing the oil market is the main attraction of this formal pact. If completed, it would mark the endpoint of a dramatic change that got underway a little over two years ago. OPEC, which has been a critical fixture of the oil market for several decades, is giving way to a new entity.

But OPEC, whose members were not always cordial but worked to at least put forth some semblance of cooperation, has ceased to be a body in which each of its members is an active participant in, and has influence over, official oil policy for the entire cartel. There have always been certain power dynamics; Saudi Arabia has always been the most powerful member. But with Iran hobbled by sanctions, and more than a few others dealing with instability and declining output, it is really Riyadh that calls all of the shots.

Riyadh and Moscow, that is. Saudi Arabia’s partnership with Russia has already supplanted OPEC as the main venue where oil policy is made. Look no further than the past few OPEC meetings, where the world watched the awkward scene in Vienna in which no decisions could be made until the Russian energy minister arrived.

Thus, it makes sense to formalize an arrangement that has already become the de facto decision-making architecture. The WSJ reports that the proposal will be discussed by OPEC+ later this month in Vienna, and could make a final decision by April.

The problem is that the same hiccups that tripped up negotiations last year remain. Russia has reservations about truly cutting its oil production by significant volumes. Russia, unlike Saudi Arabia, has multiple oil companies that are opposed to curtailing output. Also, much of the rest of OPEC aside from Saudi Arabia opposes the proposal because it could lead to a domineering alliance between Riyadh and Moscow.

In fact, the proposal from last year would have granted relatively more power to the larger producers – Saudi Arabia and Russia – ending the long-established decision-making process via consensus. The rest of OPEC panned the proposal. Related: Oil Markets React Lukewarm To Venezuela Supply Outage

Yet another hurdle to fully establishing an official OPEC+ alliance is the brewing antipathy towards the cartel in Washington. The U.S. Congress has threatened to push anti-trust regulation that would allow the Justice Department to take action against OPEC countries for colluding to manipulate the oil market. The so-called “NOPEC” legislation has been considered at times in the past, but ultimately has been shelved because multiple presidents from both political parties opposed the move, mostly due to fear of damaging the U.S.-Saudi alliance.

NOPEC legislation received renewed attention because President Trump is a bit more unpredictable and has lambasted OPEC for engineering price spikes. The murder of Saudi journalist Jamal Khashoggi also fueled momentum for the NOPEC legislation.

Now, with the Democrats in power in the House of Representatives, there is yet another push for the bill. The House Judiciary Committee is set to vote on the bill on Thursday, and there is a degree of bipartisan support for it.

The OPEC+ alliance was scrapped late last year precisely because the parties involved feared punitive action from the U.S. Justice Department. NOPEC legislation could conceivably pass into law this year.

Saudi Arabia and Russia want to formalize the OPEC+ partnership, but Washington could yet spoil those plans.

By Nick Cunningham of Oilprice.com

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  • Jim Miceli on February 07 2019 said:
    Big mistake with (WTI) at the present trading price. Time to shut in the Wells and take a vacation.
  • Mamdouh Salameh on February 07 2019 said:
    Even without a formal alliance, OPEC and Russia known ad OPEC+ have a great control of the global oil market and a dominant presence in it. They both account for 78.1% of global proven oil reserves and 54.72% of global production. Such an alliance whether it is a loose or formal could be a force for good by maintaining the stability of the global oil market and oil prices.

    However, it remains basically an alliance between Saudi Arabia and OPEC. While Russia is keen on cultivating a close strategic relationship with Saudi Arabia for economic, political and strategic reasons, it has some reservations about an official alliance particularly when it relates to production cuts. Unlike Saudi Arabia and other OPEC members, Russia’s oil production is done by multiple Russian companies in which the State has some stake. These companies have invested heavily in raising Russia’s production and are not therefore keen on cutting production deeply as they want to recoup their investments quickly. Furthermore, they can’t do the cuts promptly as there are many decision-makers and different circumstances for each of them.

    For Saudi Arabia, such an alliance enhances its position as a power to be reckoned with globally. Moreover, the idea of a formal alliance has been predicated on the strengthening of strategic ties between Russia and Saudi Arabia. The two governments have grown closer over the past few years. The Saudis see the upside of moving closer to another global power, particularly after they grew suspicious of the US government following the 2015 Iran nuclear deal. The Saudis believe that a Saudi-Russian alliance under the umbrella of OPEC+ could be more palatable to Washington than a straight strategic alliance between them.

    Still, the United States will try to spoil the OPEC alliance whether it is a loose one or a formalized one. In its effort to wrest more control over global oil markets away from OPEC, the US Congress has been pushing a bill that would let the US sue OPEC for an alleged oil price fixing. The bill called “No Oil Producing and Exporting Cartels Act,” or NOPEC, is set to be voted on by the US House of Representatives’ Judiciary Committee on Thursday and there is a degree of bipartisan support for it.

    President Trump has been relentlessly accusing OPEC of manipulating oil prices while the US Congress has been pushing a bill called “No Oil Producing and Exporting Cartels Act,” or NOPEC, that would let the US sue OPEC for an alleged oil price fixing.

    The United States has so far broken the rules of the World Trade Organization (WTO) by imposing sanctions on virtually everybody, walked away from United Nations-recognized Iran nuclear deal and also the UN-supported Climate Treaty without batting an eye lid. Moreover, the United States has been manipulating oil prices through the petrodollar and also through exaggerated claims about rises in US oil production and huge build-up in its oil and refined products inventories in order to depress oil prices and achieve geopolitical and economic aims. One who lives in a glass house shouldn’t throw stones.

    I have argued forcefully on the pages of oilprice.com and proven that OPEC is not a cartel and has never been one throughout its history. How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil.

    Still, OPEC shouldn’t be unduly worried about the NOPEC Act. It has enough muscle to retaliate against the US. Were the United States to mount a lawsuit against OPEC or any of its members, the organization could stop all its oil exports to the US and even cut its oil production to force prices up. This will harm the US economy most being the world’s largest consumer of oil. Another measure OPEC and Saudi Arabia could take against the United States is to replace the petrodollar with the petro-yuan in their oil transactions. That would be the biggest ever retaliation against the US.

    In fact, OPEC should pre-empt and sue the United States at the WTO for manipulation of oil prices to achieve unfair benefits for its economy at the expense of the economies of OPEC members.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School
  • Bill Simpson on February 07 2019 said:
    If only Canada could get some pipelines in the ground instead of wasting money and energy on rail transport, which also creates more pollution.
  • John Di Laccii on February 07 2019 said:
    Who needs Saudi Arabia and spread of their silly ideology, the sooner we finish with them the better. And it is easy to do that by roperly fixing OPEC and IPO. With current situation, why should anybody thrive to help them?

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