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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Saudis Study Potential OPEC Collapse

Saudi Arabia is studying the theoretical dissolution of OPEC, the Wall Street Journal reports, citing sources from government think-tank King Abdullah Petroleum Studies and Research Center, which is in charge of the study.

The cartel has gone through a turbulent couple of years after the 2014 price collapse, when its pump-to-the-max strategy failed to bring down U.S. shale producers and only caused a glut that hurt OPEC members themselves. Now, its largest member and natural pack leader is struggling with a backlash from investors following the murder of dissident Jamal Khashoggi and falling demand for crude.

The WSJ quotes source as saying what prompted the study was the realization that demand for oil will one day peak and Saudi Arabia needs to prepare for that day. But that’s long-term strategizing that one may argue is well overdue. On the other hand, there are short-term problems within OPEC, the sources said. Some members of the cartel are unhappy about the closer relations between Riyadh and Moscow and have complained about being sidelined by the new duo.

One Saudi official told the WSJ Riyadh was itself wondering if Saudi Arabia won’t be better off with only Russia as a partner: together the two produce more than 20 million bpd of crude. Put bluntly, it might well be easier to swing markets with only one partner instead of a dozen, among them your archenemy Iran.

The WSJ talked to Adam Sieminski, the head of the King Abdullah Petroleum Studies and Research Center, who commissioned the study and he said the research built on earlier studies that focused on OPEC’s spare capacity and its role in oil market stabilization. The study looks into two scenarios: one, in which Saudi Arabia strikes out on its own as a market swinger and one, in which all OPEC members compete among themselves and non-OPEC producers, including the Kingdom. Conclusions are yet to be made.

By Irina Slav for Oilprice.com

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  • Mamdouh G Salameh on November 09 2018 said:
    The influence of OPEC has closely followed the peaks and valleys of the world's demand for oil. September 14, 2018 marked the group's fifty-eight anniversary — more than a half-century of existence characterized by embargo, conflict, and even war. Still, OPEC has managed to whether the storm and remain a great pillar of the global oil market.

    Saudi Arabia was one of the original five founders of OPEC. The others are Iraq, Iran, Kuwait and Venezuela. Although Saudi Arabia is acknowledged as the de facto leader of OPEC, it is not within its power to decide to dissolve the organization. OPEC will remain an influential organization whether Saudi Arabia stays a member or not.

    Decision-making inside OPEC is quite complicated most of the time. This is because the policies of its de facto leader Saudi Arabia sometimes differ radically from other OPEC members’ in relation to prices and supplies.

    If OPEC has gone through a turbulent couple of years after the 2014 price collapse, it is because Saudi Arabia decided for purely political reasons to flood the global oil market in defiance of OPEC’s time-honoured and agreed policy of cutting production to bolster oil prices. This time at its 166th meeting on the 27th of November 2014 OPEC decided under strong pressure from Saudi Arabia not to cut production.

    Saudi Arabia’s oil strategy aimed at defending its market share, taking advantage of low oil prices to inflict damage on Iran’s economy and weaken its influence in the Middle East in its proxy war with Iran over its nuclear programme and also slowing down the development of US shale oil production.

    However, the Saudi strategy failed miserably in harming Iran’s economy and disrupting US shale oil production and inflicted huge damage on the Saudi economy, the economies of OPEC members and the global economy at large.

    Of course, Saudi Arabia has always the option to withdraw its membership of OPEC but to what advantage. Saudi Arabia draws a lot of political and economic influence from being part of an influential organization such as OPEC. Were it to decide to withdraw from OPEC, it will certainly lose a lot of influence in the global oil market not dissimilar to Britain’s loss of economic clout in the global economy by its decision to withdraw from the European Union (EU).

    If the objective of leaving OPEC is to give itself a free hand in its oil policies and increase its production freely, this is not going to happen since Saudi Arabia neither has the production capacity to increase production nor the spare production capacity. Even the 400, 000 barrels a day (b/d) which Saudi Arabia added to the market three weeks ago under intense pressure from President Trump didn’t come from new production but from oil stored on board tankers and on land. So a Saudi Arabia speaking on behalf of OPEC with 71.8% of global proven reserves and 42.6% of global production is far more beneficial for it rather having the global oil market pondering about the true volume of its proven oil reserves and production capacity.

    Furthermore, the study by King Abdullah Petroleum Studies and Research Centre is based on at least one faulty assumption, namely the realization that demand for oil will one day peak and Saudi Arabia needs to prepare for that day. Despite the advent of electric vehicles (EVs), the demand for oil in absolute terms is not projected to peak though a wider use of EVs could decelerate the rate of its growth. There will never be a post-oil era throughout the 21st century and the probably far beyond. Still, Saudi Arabia doesn’t have to leave OPEC to prepare for a peak in oil demand.

    Saudi Arabia’s partnership with Russia is not an alternative to OPEC. This is a tactical partnership used by President Putin to enhance his country’s influence in the global oil market. Russia is an energy superpower capable of living with an oil price of $40 or less compared with Saudi Arabia’s need for an oil price above $100 to balance its budget. Moreover, Saudi Arabia and Russia are diametrically opposed to each other ideologically and politically. Russia supported by China is trying to undermine the current unipolar role currently enjoyed by the United States whilst Saudi Arabia will do anything to remain in the US’s good books. So such a partnership will be very short-lived.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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