By: Samira Pakmehr, Columnist
Photo Credit: Getty Images
The Organization of Petroleum Exporting Countries (OPEC) found itself under immense pressure last week to increase oil production as crude oil prices jumped to $80 per barrel. Donald Trump’s tweets and recent speech at the United Nations General Assembly session in New York demand an output boost of oil barrels from OPEC in order to lower prices.[i] However, US sanctions on Iran will decrease the country’s oil exports this November, resulting in a sizeable supply gap that OPEC members have yet to close following its September meeting in Algiers. Iran’s position as a leading oil supplier is vulnerable, especially given OPEC’s internal geopolitical rivalries. OPEC’s decisions surrounding a potential Iranian supply shock in the face of US pressure will reveal whether the cartel can function from purely economic goals.
The Joint Ministerial Monitoring Committee (JMMC) meeting in Algiers on September 23, 2018 between OPEC and Russia displayed confidence in OPEC capabilities to meet market demands despite rising prices and questions of supply. Saudi Arabia’s Energy Minister Khalid al-Falih announced that the country can add 1.5 million barrels per day to the market, but does not find it necessary at this time.[ii] In agreement with al-Falih, the UAE and Russia told reporters they will not increase output despite their ability to do so, rejecting Trump’s wishes. OPEC’s World Oil Outlook, an annual publication highlighting the oil industry’s future, explains the cartel’s optimism behind the meeting’s outcome. It forecasts global demand to continuously grow through 2040 and that its market share will expand in the next decade.[iii] Such hopes demonstrate the decision to let the market naturally balance, but several factors like sanctions, fluctuating currencies, and potential trade wars blur any long-term projections.[iv]
Iran’s rivalry with Saudi Arabia leaked into committee proceedings, demonstrating Iran’s exposed position within OPEC. Prior to the JMMC meeting, Iranian Oil Minister Bijan Zanganeh announced that Iran would veto any OPEC decision regarding new supply agreements that support American policies, as potential increases in Saudi barrels would lead to profit increases for the kingdom to the detriment of Iran’s oil revenues.[v] While the JMMC ultimately decided to maintain oil production at its current levels, Iranian unease preceding the decision highlights just how much Iran’s position in OPEC hinges on geopolitics.
To counter its vulnerability within OPEC, Iran seeks to sell its oil to countries who can absorb costs for trading with a US-sanctioned nation. China is a main contender for such transactions as its trade wars with the US portend increasing economic isolation from the West. A lasting relationship with China could benefit Iran. If Beijing sought to impose tariffs on US goods as a trade barrier, then Iranian exports could serve as replacements and bring economic prosperity.[vi] If Iran’s future role within OPEC recedes, a new partnership between Iran and China would reduce the cartel’s share of the oil market it predicted to increase in the World Oil Outlook.vii
Combined with Iranian sanctions and a willingness to appease the US, OPEC will discover supply shocks damaging to the crude industry if they do not escalate output. Gas prices would rocket, and it would not be safe for producers to assume consumers will pay any fuel price.viii OPEC as a cartel faces diminishing relevance given rising supply from big competitors like Russia and US shale. ix A new Russo-Saudi alliance is still likely to occur given high production capabilities. The Iranian economy and its oil are more uncertain. Much cannot be said until sanctions take place later this year, but it will be necessary to bypass them for rial stabilization and trade opportunities. The next meeting this December will shed light on Iran’s standing in OPEC’s power politics, pending the type of effect sanctions will have on the cartel’s oil output. Depending on if the oil market truly needs more barrels or not, Saudi appeasement for US policies seeking crude barrel additions from OPEC will be telling of whether the cartel functions on geopolitics or economics.
[i] Rania El-Gamal, Ahmad Ghaddar, and Olesya Astakhova, “OPEC, Russia Rebuff Trump’s Call for Immediate Boost to Oil Output,” Reuters, September 23, 2018, https://www.reuters.com/article/us-oil-opec/opec-russia-rebuff-trumps-call-for-immediate-boost-to-oil-output-idUSKCN1M30DK.
[ii] Ellen R. Wald, “Saudi Arabia And Russia Fire Back At Trump On Oil Prices,” Forbes, September 23, 2018, https://www.forbes.com/sites/ellenrwald/2018/09/23/saudi-arabia-and-russia-fire-back-at-trump-on-oil-prices/#6aa4b04b2c29.
[iv] Liam Denning, “OPEC Is the Oil Producer of an Unlikely Future,” Bloomberg Opinion, September 24, 2018, https://www.bloomberg.com/view/articles/2018-09-24/opec-world-oil-outlook-sees-an-unlikely-future.
[v] Golnar Motevalli, “Iran Warns It Will Veto OPEC Decisions Harming Its Interests,” Bloomberg, September 20, 2018, https://www.bloomberg.com/news/articles/2018-09-20/iran-warns-it-will-veto-opec-decisions-that-harm-its-interests.
[vi] Ted Regencia, “What US Sanctions against Iran Will Snap Back on Tuesday?” Al Jazeera, August 6, 2018, https://www.aljazeera.com/news/2018/08/sanctions-iran-snap-tuesday-180804193910915.html.
vii “WOO 2018.”
viii Denning, “OPEC Is the Oil Producer of an Unlikely Future.”
ix Julian Lee, “OPEC, Like a Dying Star, Is About to Go Supernova,” Bloomberg Opinion, September 23, 2018, https://www.bloomberg.com/view/articles/2018-09-23/opec-like-a-dying-star-is-about-to-go-supernova.