The OPEC Showdown

It has been clear for some time that OPEC members are deeply split over whether $100 oil is good for them in the long-term. Saudi Arabia, having been in this game a long time, probably understands better than most the effect that high oil prices will have. While short-term gains will be great, ultimately economies will falter and demand for their product will be destroyed. Iran and Venezuela, on the other hand, probably couldn’t care less whether the U.S. economy chokes on these prices. The Financial Times covers the impending showdown:

Opec rivals in sequel to oil production drama

The Opec summit show is over and the performers have left town. But the preparations for Act Two, the meeting of oil ministers in Abu Dhabi on December 5, are already under way.

The scene is being set for a contest over whether to accept an oil price close to $100 a barrel or try to bring it down by raising production, with Iran and Venezuela on one side and Saudi Arabia on the other. The ministers’ decision will be an important signal of whether the influence of Saudi Arabia, traditionally the group’s most powerful member, is on the wane.

I think that Saudi will win this round and get a compromise production increase, but this disagreement will continue to fester.

“They [Saudi Arabia] have been trying to soothe the market’s worries for two reasons: because they think that the high oil price will hurt the economies of consuming countries, and more importantly, because they think it will hurt demand for oil in the medium to long term,” she said.

Iran and Venezuela have no such concerns. Their priority is to maximise short-term revenues. Their industries probably lack the capacity to pump any more oil, so they would not benefit from any increase in Opec’s production limits. Unlike Saudi Arabia, they take little interest in safeguarding the health of the US economy.

Saudi Arabia demonstrated at the previous Opec meeting, in September, that it could still get its way in spite of strong opposition from other members.

Ali Naimi, the Saudi oil minister, convinced the rest of Opec to agree an output increase of 500,000 barrels a day, as a contribution to the world’s economic stability.

But resistance from even Saudi Arabia’s traditional allies, such as Qatar, highlighted its growing difficulties in managing Opec.

And if Saudi does want a production increase, they may end up shouldering the bulk of the increase:

There are signs that Saudi Arabia has been going it alone in increasing production; analysts estimate that it has accounted for the lion’s share of the Opec production increase agreed in September, and perhaps even more.

Mr Naimi said recently that Saudi Arabia’s output was now 9m barrels per day. Edward Morse, chief energy economist of Lehman Brothers, says that is about 600,000 b/d more than estimates of Saudi production over the summer.

If they don’t (or can’t) start to bump up production faster than they are currently doing so, by next summer we may think $100 oil is cheap.

7 thoughts on “The OPEC Showdown”

  1. The OPEC summit no longer has the influence it once had because their exports no longer seem to follow their statements. Saudi Arabia has said that they want an orderly market and that prices are too high. They said that at $60 dollars per barrel.

    The market can no longer be talked down. ONLY an increase in exports will bring the price down. It doesn’t matter what is said.

  2. Actually, OPEC has been following their statements. There has been a lot in the news recently about their exports being significantly up:

    Oil Movements, an oil tanker tracking firm based in Britain, estimated last week the OPEC will increase its exports to 24.5 million barrels a day in the four weeks ending Dec. 8, compared with 23.8 million barrels in the month ended Nov. 10. It will be the fourth straight week the OPEC increases its exports, according to Oil Movement.


    Oil had fallen earlier on signs of higher OPEC shipments in early December. OPEC oil exports, excluding Angola, will rise by 720,000 barrels per day (bpd) in the four weeks to December 8, according to Roy Mason of tanker tracker Oil Movements.

    The increase will be the biggest this year, with most of the extra supply heading to Western refiners. Mason estimated that seaborne exports from the 11 OPEC countries would rise to 24.54 million bpd from 23.82 million bpd to November 10.

    At this point, I think speculators are ignoring some very significant signs that point to rising supply, and are setting themselves up for serious losses.

  3. I don’t know if this is news to peak oil aficionados, but last week I attended the Australian Society of Exploration Geophysicists/Petroleum Exploration Society of Australia/Formation Evaluation Society of Australia conference in Perth (, at which Saudi Aramco’s VP Exploration, Mr Abdulla Al Naim, gave some details of new projects coming on stream in the next few years. The resulting total Saudi oil production was projected to be somewhere between 12-13 million barrels per day by 2012. No word on what happens after that, though.

  4. i’ve read about the saudi intent to increase production by 2-3 million bbl/day within the next few years. i’ve not heard of any significant new discoveries in the area.

    is my recollection correct? is this effort nothing more than acceleration of recovery from known reserves? potentially more rapid depletion–per simmons?

    thanks, fran

  5. Bleh, google news needs to archive old listings. My memory is that in 2004 or 2005, the word in the press was that Saudi Arabia was expecting to be in the 13-15mbpd range by 2012 and looking to hit 20mbpd by 2020. I don’t suppose anyone has old articles that probe/disprove this?

    Regardless, considering that Aramco is likely talking total capacity, rather than how much they’ll actually produce, right now isn’t Saudi Arabia at 10.5-11.5 of production capacity? 12 suddenly seems a lot less impressive without remembering that they’re fighting decline.

  6. I’m going off memory, as I stupidly didn’t take any notes, but my impression was that the new capacity was coming from reserves that have been known for a while, but have not yet been subjected to any extraction.

    And the expected 2012 production (expressed graphically) was definitely closer to 13 than 12 Mbpd.

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