September 12, 2008
VIENNA: Hours after suffering a rare setback at OPEC headquarters, where the oil cartel said its members needed to lower production to keep prices from sinking below $100 a barrel, Saudi officials assured world markets Wednesday that they would ignore the decision and continue to pump as much oil as needed.
The marathon late-night session illustrated the new pressures and power politics at play in the group that controls 40 percent of world oil production - and how ineffective it can be. The meeting might be a harbinger of things to come, as OPEC faces its most difficult challenge in years: how to respond to falling prices in a weakening and uncertain global environment.
The Saudis made their strategy clear in informal talks and briefings with some oil industry analysts and reporters, but as it is their custom they would not speak for attribution because they did not want to appear to undermine a collective decision by OPEC that they endorsed publicly.
The confusion surrounding the meeting briefly slowed the decline in prices as oil markets tried to untangle the cartel's byzantine decision. But thanks to the Saudi assurance and lower oil consumption data, oil for October delivery was down 37 cents at $102.89 a barrel on Wednesday afternoon in New York. The price has dropped 30 percent since its July peak of $147.27.
OPEC members are getting anxious as oil approaches $100 a barrel. In its surprise decision after a six-hour meeting that began late Tuesday and stretched well into the night, the Organization of Petroleum Exporting Countries said its members had agreed to pare down their production and comply strictly with targets set up last year but that were largely ignored.
The cartel's president, Chakib Khelil, said the group was concerned that slowing demand for oil was creating a glut in the market that might provoke a collapse in prices. To tighten discipline, Khelil said, the group's actual production would have to be reduced by about 500,000 barrels a day.
Abdalla el-Badri, the group's secretary general, said, "We are oversupplying the market, and we are cutting that oversupply." Badri added: "The price was coming down dramatically. The declines of the past are still in our memory. We don't want to see these prices decline dramatically."
Despite the decision, it is far from clear whether OPEC producers will actually reduce their output. On Wednesday morning, Saudi officials were quick to reassure markets that they would continue to provide customers with as much oil as needed.
In June, King Abdullah of Saudi Arabia pledged his country would pump at full tilt to bring prices down. In August, the kingdom increased its production to 9.7 million barrels a day, the highest level in three decades. Saudi Arabia is now producing around 9.5 million barrels a day, 600,000 barrels a day more than its quota.
The Saudi message is to wait and see where demand is headed before reducing supplies. The OPEC decision in effect puts the kingdom in the driver's seat in setting its output for the autumn, according to Greg Priddy, an energy analyst at Eurasia Group.
"Clearly, other OPEC members are not going to trim their own production without Saudi Arabia returning to its quota," Priddy said in a research note. "Saudi Arabia also seems to be eager to avoid headlines about it cutting production in advance of the U.S. elections."
OPEC's discordant message is a reflection of the competing policies at play within the group. Some countries are being careful managers of their oil windfall, while others are spending freely with the expectations that prices will remain high.
Moderate and pro-Western states like Saudi Arabia and the United Arab Emirates are aware that high energy costs are hurting demand and migh t push consumers to seek alternatives to oil. They want to see prices fall below $100 a barrel to ease the political backlash against the cartel.
Another group, composed of OPEC's traditional price hawks, increasingly needs high prices to finance a wide range of social and military policies.
Analysts believe that Iran and Venezuela, for example, cannot afford prices below $100 a barrel as they seek to project power and influence in their respective regions. Rafael Ramírez, the Venezuelan oil minister and one of the main backers of OPEC's high-price policy, said in Vienna that he expected prices to stabilize at about $100 a barrel.
As OPEC worked to push prices up from lows reached in the late 1990s, members of the cartel all shared the same interests and were willing to leave their differences aside. But now that demand is weakening and prices are falling, some analysts believe tensions within the group might resurface. In past years, OPEC has been notoriously bad at managing its discipline when prices fall.
High prices are affecting consumers and pushing down demand. The International Energy Agency reduced its estimate for global oil consumption for both this year and next and said that U.S. consumers were changing their lifestyles in response to high prices.
In North America, oil demand shrank for the seventh month in a row, falling 2.9 percent in July, the energy agency said in its monthly report released Wednesday. "The demand impact of weaker economic condi tions and high prices during the summer - when oil prices reached an all-time peak -was more marked than expected, notably in the United States," the agency said in its report.
The perception that OPEC was unwilling to help bring down oil prices quickly brought sharp criticism from Western officials.
"We'd like to see more oil on the market, not less," the White House press secretary, Dana Perino, said at a briefing.
The decision represents a rare case of the cartel going against the position of its biggest member. When Naimi, the Saudi minister, arrived in Vienna he said that the market was "fairly well balanced." Later, as he walked from his hotel to the OPEC headquarters on Tuesday evening, Naimi seemed particularly proud of his country's efforts to pump as much oil as needed to push down prices.
"It was hard work," Naimi said then, giving every indication that the Saudi pledge would not be obstructed. "The market is in a very healthy position. Demand for Saudi crude is very healthy."
Six hours later, Naimi left the meeting without a word.