Opec in the Era of Trump-Putin

Robin Mills

American leaders have often sought to bully Opec. While previous presidents “jawboned” the oil exporters to bring down prices, Donald Trump tweets. Few, however, have done so from a position of strength. But now, the US’s own swelling production, and a conjunction of politics, means that whenever Washington speaks, Vienna listens.

In the 1990s and early 2000s, things were simpler. The US was a quite large but declining producer whose impact on oil supplies could be ignored. Russia was an annoying competitor that threatened to take market share and did not follow through on promises to cooperate with Opec, but it was economically weak and not a political player in the Middle East.

Now, the US’s crude production has swelled to the largest in the world, crossing 11 million barrels per day last week for the first time ever, and it has become a big exporter – though remaining an importer on a net basis. High oil prices are still a negative for US motorists, but less so for the economy as a whole. They also benefit Republican states such as Texas, Oklahoma, North Dakota and Alaska.

As for Moscow, it has an odd co-dependent relationship with Washington at the top level, while still being adversarial in other theaters. At the Helsinki summit, Vladimir Putin offered oil as an area of cooperation, and said that neither country was interested in “the plummeting of prices.” Devaluation has improved Russia’s cost base, but new fields in the Arctic and offshore and shale production are expensive. Meanwhile, despite the obvious contradictions, the Kremlin now has important relations with several Middle East countries, particularly Iran, Saudi Arabia, the UAE and Qatar. The “Opec+” deal has been a key source of influence.

Opec had to bear in mind these contradictory pressures, as well as its usual concerns over competing supplies, demand and economic growth, when it met in Vienna in June.

Whether because of American pressure, the Russian desire to move on or a wish to keep the pressure on Iran as sanctions tighten, Saudi Arabia and its allies appear to have jumped even before the Opec meet, ramping up exports from the start of June. They were prepared to raise production above individual country limits, as long as they stayed, overall, below the group’s ceiling, an easy target as Venezuela’s production continued its collapse.

When this emerged, it became clear that the Iranians had been out-maneuvered. They had thought the Opec meeting’s communiqué granted their realistic best-case: a steady, phased lessening of cuts, where countries would produce up to their individual limits.

But Saudi Arabia, too, may have been bounced into hastier action than is its habit. I had argued beforehand that a bold move would be right, avoiding a spike in oil prices that would be damaging to the economy and future prospects of oil demand. Riyadh has in the past cautiously reacted to backward-looking market indicators that may be a month or two out of date when they emerge. Now after the sharp expansion in June, Saudi production has been cut back again in the first half of July, by about 500 000 barrels per day, as doubts emerge over the strength of Asian demand.

The relevance of Opec – and in particular of its core Gulf Arab members, Saudi Arabia, the UAE and Kuwait – depends on two things. One is spare capacity – to be the indispensable player that can ramp up production quickly to meet a sudden disruption, as they did in the First Gulf War and then again during the Libyan Revolution in 2011 and the subsequent sanctions on Iran. Recent research by the King Abdullah Petroleum Studies and Research Center argued that Opec’s spare capacity benefited the world economy by $170-200 billion annually. Other options would not be enough to tackle a large, extended crisis: the strategic stocks of oil in the OECD countries and China are too small, and shale drilling cannot react quickly enough nor produce the desired quality of oil. But Gulf Arab spare capacity too would be stretched thin if the US gets close to its stated aim of reducing Iranian exports to zero.

The Opec leaders’ other key ability is to increase production to deter other countries from trying to gain market share, as Venezuela did in the late 1990s. By bringing down prices and keeping them low, they can fight a price war. This strategy was adopted by the Saudis when, in November 2014, Opec surprised many observers by not cutting production even as prices crashed. This was at least partly in the hope of damaging the US shale oil industry, which at that point was believed to need prices of $80 to $100 per barrel to survive. But low oil prices proved hard to endure for all producing countries, which were forced into budget cuts, austerity programs and to draw down on sovereign-wealth assets. US production did fall, but not as steeply as expected, and from late 2016 it began growing again, even as prices were less than $50 per barrel.

Opec has held several meetings with US shale producers, including in Vienna where John Hess of Hess Corp., Harold Hamm of Continental and Scott Sheffield, chairman of Pioneer, were invited. Sheffield, who might almost have been echoing Trump, said that a price range of $60-80 per barrel would be best for Opec, shale drillers and demand. But for practical and legal reasons, despite some Opec hopes, shale drillers cannot cooperate with it.

Russia and the US are enormous players in oil markets today, but have nothing like the strategic agility of the core Opec members. Their diplomatic, military and, for America, economic power, though, allows them to act in multiple dimensions. Opec’s contribution remains irreplaceable, but the complexity of its political environment has multiplied.

Robin Mills is CEO of Qamar Energy and author of “The Myth of the Oil Crisis.”