The Organization of the Petroleum Exporting Countries has done enough to ensure it is certain of derailing production increases in countries other than the top producer Saudi Arabia. History tells us that this means it cannot rely on the words of US president Donald Trump to be persuasive in persuading other oil producers to maintain discipline and raise prices.
Iran and Venezuela have both hinted that they might increase production if this was the case. But it is much less clear whether the six other members of the cartel – led by Saudi Arabia – are prepared to follow its course.
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The main obstacle will be the United Arab Emirates (UAE), despite its new “oil diversification” strategy. The UAE feels its position in OPEC is strong and that increased production from Saudi Arabia and Iran would diminish the importance of the cartel and increase the costs for those in it.
The Emirati strategy, known as “Algomar”, is based on an agreement in March 2017 to boost production by 600,000 barrels per day (bpd) in return for a pledge by producer states to cut output by 1.2m bpd. This was supposed to have taken effect from June 2017, but countries including Kuwait and Qatar have declined to implement their part of the deal.
Following this outcome, the governments of both Iran and Iraq reported they would increase production by as much as 500,000 bpd. The UAE did not respond. After a few months of feverish negotiations between Iran and the UAE, two disagreements arose.
Firstly, the Emiratis asserted that Emirati production would increase by 300,000 bpd from its coastal waters. This might be in violation of earlier agreements but it would also not be unusual. Many states – like Nigeria and Libya – build up domestic production in offshore regions.
Moreover, the UAE may also not be capable of reaching this target. Its legislation does not have adequate local capacity to provide the necessary technology. Furthermore, as in many economies, the state is taking over large sectors of industry, including oil, from companies and leaving its citizens high and dry.
There are also concerns about which reservoir is producing – while it appears safe, the UAE does not really know how much it is pumping at any one time, though it estimates at 10.6-10.7 million bpd.
A second problem is over the split between the Gulf Cooperation Council countries, which are either cutting or maintaining production. Qatar has been at loggerheads with its fellow GCC members for months, but the deterioration of the situation has been dramatic in the past few weeks.
Now there is reason to fear a full-scale regional war, the possibility of which had lessened when a ceasefire agreement was announced on 21 November after the resulting protest by 15 Arab countries led by Saudi Arabia. But that deal now appears to be compromised.
Key questions remain unanswered: just what was meant by the intervention by Riyadh in Doha on 3 June and its blockade since? Were there negotiations to end the blockade in which the Emiratis and Qataris reached an agreement? Did Iran and Turkey close their border to Qatar when the blockade was imposed, and is this a new cause for regional conflict?
If there were such discussions, which point in time were they held? At which meeting? What is the outcome of them and what was the agreement that was reached? Is there a new strategic consensus in the Gulf that is compelling these states to band together?
For Saudi Arabia, rising oil prices will help in its preparations for war
The response of its neighbours to this escalation is not clear. Apparently they are not willing to impose sanctions on Qatar – a progressive reformer that is being encouraged to adopt more liberal and regional positions – but are determined to isolate it economically.
None of this will end the crisis in the Gulf. For Saudi Arabia, rising oil prices will help in its preparations for war. For Qatar, which is leading a diplomatic offensive to overcome the blockade, rising oil prices and some market confidence might provide some encouragement, but are far from what the Gulf country needs. In a bit over a year’s time, these developments will have a significant impact on how the global economy fares.
Easily the most serious threat to oil stability comes from shale producers – both in the US and the Gulf. The quest for ever-greater profits will result in continued large quantities of cheap and abundant crude. Therefore, for oil producers outside OPEC, achieving high prices in the long term is essential. However, this outlook is far from clear.
A surprise victory for Donald Trump in the midterm elections in the US, together with turmoil in the Middle East, could not offer a better scenario for oil producers outside OPEC. A minor