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OPEC may end up taking a tough route in spite of itself

OPEC meets November 30, as Energy Economist goes to press, in an attempt to reach some form of production freeze deal, but amid a number of disputes that make agreement very difficult. There are short-term incentives, under the pressure of summitry, to come up with something — anything! — but the underlying problems mean that any deal reached is unlikely to have much substance or longevity.

There are a plethora of problems. First and foremost, Saudi Arabia has nothing to gain from acting alone. It could reverse its market share strategy, and resume its traditional role as swing producer, but this would only serve to rejuvenate non-OPEC production.

Moreover, future growth in Iraqi and potentially Iranian output means that Saudi Arabia would face competition not just from non-OPEC producers, but internally within OPEC. Even short-term production constraints fly in the face of Iraq and Iran’s medium-term growth ambitions.

More broadly, the need to monetize oil reserves has become more pressing, not just because of short-term budgetary requirements, but because of the possibility that low carbon energy initiatives will eventually see oil demand start to decline.

As a result, whether OPEC can function as a cohesive organization is going to depend in future on whether Saudi Arabia, Iran and Iraq can find common ground.

The basic rule on this is that they must all benefit or suffer equally from any policy position, not least because Saudi Arabia and Iran are locked in various proxy wars in the region and it is oil money that funds them. But both Iran and Iraq view themselves as special cases. Iraq is still fighting Islamic State, Iran is recovering from sanctions. Whatever the legitimacy of their claims, either historically or based on current problems, exemptions mean unequal burdens.

Moreover, Iran and Iraq are not the only special cases. Libya and Nigeria too have claims for lenient treatment. Libya is very slowly, in fits and starts, raising production, hitting an 18-month high of about 600,000 b/d in October. Nigerian output remains below capacity because of further outages at one of its main Niger Delta export grades. Together they have about 800,000 b/d of production that could come back on-stream in the relatively near future; equally, output could be hit by further instability. The unpredictability of production from Nigeria and Libya makes concerted action by Iran, Iraq and Saudi Arabia...

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