The Doha 2016 agreements have failed. Though expectations of a breakthrough in agreements boosted prices of Brent futures to 43.90$ a barrel and U.S WTI at 41.57$ (CNBC), political deadlock pulled back prices to 42$ a barrel on the 18th of April. The oil industry “is in its deepest downturn since the 1990s” according to the New York Times; economies are failing, and civil unrest is heightening. An increase in oil prices or a decrease in the global oversupply of oil is much needed, yet unfulfilled by OPEC’s inability to stabilize the oil market. The reasons for this deadlock are complex: structural problems within OPEC, governments’ overreliance on the oil industry, and competing interests between oil producing nations have created a vicious cycle where governments are unable to reduce supply at the expense of harming their economies. Religion and ideology, characteristic of the middle-east, have concreted unwillingness to compromise. Prospects of an OPEC led supply reduction initiative are bleak, yet prices may rebound due to unexpected factors.
- Structural problems within OPEC
Not all OPEC nations are equal. For example, Saudi Arabia, United Arab Emirates, and Kuwait have low reserve funds and robust foreign currency reserves enabling them to run deficits even if oil prices are unsustainably low in the short run. On the other hand, Iran, Iraq, and Nigeria have less flexibility in economic policy; their combined foreign currency reserves are less than 200$ billion, even more, strained by new foreign exchange controls in Nigeria. These nations are inherently oil-dependent economies with Iraq deriving “58% of its Gross Domestic Product from Petroleum.” Thus, the effects of the reduction in oil prices are felt differently, which is why Saudi Arabia can use low prices as political leverage against Iran. In this light, the decision-making procedure of OPEC has been criticized by Iraqi Oil Ministry Spokesman, who claims that “[reliance on unanimous decisions] prevents correct decisions because some states insist on maintaining production quotas at previous meetings, which in turn provoked a further decline in prices unacceptable to oil producing countries.” Inherent economic disparities between nations have thus created an imbalance in power, and the structure of OPEC has barred nations from pursuing a compromise with an equally perceived degree of urgency.
- Governments’ reliance on the oil industry
In the International Monetary Fund (IMF) Regional Economic Outlook: Middle East and Central Asia paper, Iraq derives 58% of its Gross Domestic Product from petroleum. Libya gains 85% of its earnings from oil, and Saudi Arabia gains 78% of its revenue from the oil industry. Clearly, a rise in oil prices or a reduction in production is much needed for these nations to maintain a sustainable oil industry. Alexander Nazarov, an oil gas analyst at Gazprombank, quotes that “Russian budget is starving” due to the slump in low oil prices. Yet, nations like Iran will continue to increase its production despite calls for austerity. Oil production is integral for Iran’s recovery from damages inflicted by long-term sanctions. Though Russia’s output, according to OPEC Secretariat, is expected to “decline by 20,000 barrels per day on average,” it cannot afford to lose ground in the market at the price of opening opportunities for new competitors. These nations must diversify their industry to reduce potential risk.
- Competing interests between nations
Under the oil problem lies geopolitical cleavages. The rivalry between Saudi Arabia and Iran has deepened after the Saudi embassy in Tehran was attacked after a Shia leader Nimr al-Nimr was executed. The two nations have accused each other of waging proxy wars, and for stymieing the Doha Agreements. Iran refused to uphold the proposed oil production freeze which would devastate its post-sanction recovery. On the other hand, Saudi Arabia banned Iran from participating in the agreements altogether; Russia’s energy minister. Alexandr Novak remarked that Russia was “disappointed” and pointed out “how Iran [could] be the reason for the talks’ failure, when it wasn’t even here.” Moreover, Saudi Arabian diplomatic relations between the United States and its middle-east allies have been severed due to the United State’s record oversupply of shale oil and Justice against Sponsors of Terrorism Act. Saudi Arabia’s refusal aligns with its interest to force new shale oil competitors out of the market by maintaining low oil prices. Though the failure of the Doha cannot be attributed to a single state, it is clear that Saudi Arabia had a high stake in producing such results.
- Prospect, unexpected factors, conclusion
The International Energy Agency prospects an overall reduction in non-OPEC production by 700,000 barrels a day. The reputation of OPEC has been further tarnished. Iran and Russia have already boosted their production rates: 3.3 million bpd. Global oil demand, especially in East Asia, has increased, and according to the wall street journal, projected “to rise by 1.2 million barrels a day to 94.18 million bpd. It seems that oil prices are to stay low for now. CNN money recently reported that a fire in oil-rich province Alberta has driven up oil prices, though temporarily. According to Anthony Starkey, energy analysis manager at Bentek Energy quotes that “This fire is raging near where a lot of the oil activity takes place. This is a very real event and it’s taking supply off the market.” Maybe the solution to this crisis is nature and time to slowly erode away our oil reserves.
Written by 임한성