Despite the oil producers’ cartel OPEC has agreed to make a record cut in output, oil prices continue to fall
The ongoing oil crisis certified that the Organization of Petroleum Exporting Countries (OPEC) does not have a lot of power within an environment of declining demand.
During their last meeting in Algeria in December, The 13-nation organization has agreed to make a record cut in output, slashing 2.2 million barrels per day (bpd) from its current supply as its biggest previous cut in production was in April 1999 when it cut production by 1,716,000 bpd. Two million barrels represent about 5% of OPEC’s production and that is the reason why the target for production for the 13-state members is now 24.845 million bpd.
The cut is effective from January 1st, but the big question often raised; will OPEC members abide by the cut that has been agreed upon?
Since last September, OPEC made two other cuts, meaning that a total reduction of 4.2 million bpd was made in four months. In October, the organization decreased the production by 1.5 million bpd during their meeting in Vienna, Austria, however, prices remained falling, and hit a four-year low of $40.5 a barrel on December 5th.
This continuous price fall despite the production cuts raises concerns about OPEC’s loss of power. What greatly ensured the inabilities of OPEC to exercise its influence and control princes was OPEC President Chakib Khalil’s statement: “The Organization of Petroleum Exporting Countries, aiming to exercise greater control over global oil production and pricing, wants Russia to become a member”.
Russia is the world’s major non-OPEC oil producer, sometimes producing more oil than OPEC- larger oil producer Saudi Arabia, which has a quota within the group of 8.5 million bpd.
The issue of Russian membership in OPEC arose earlier last year, when Russian Deputy Prime Minister Igor Sechin said during that time that his country would coordinate its oil production with OPEC. This stated intent later took the form of a cooperation agreement handed by Russia to OPEC. It was expected to be brought for consideration in that meeting but in vain.
Yet, much though OPEC would like to bring Russian exports under its quota system, cooperation is thought unlikely to extend much beyond coordinating some production cuts, with full-blown membership out of the question.
“We just examined our options and pitched to see how the market would respond,” said Alexei Gromov, Deputy General Director for Science at Moscow’s Institute for Energy Strategy.
“Joining OPEC would seriously curb our space for maneuver,” said Gromov, “Russia has already taken its own niche in the market and would not want to give it up.”
That “niche” which Gromov mentioned is the reason for Russia to maneuver freely away of OPEC decisions. For instance, when OPEC powerhouse Saudi Arabia announced that the group would slash a record 2.2 million barrels from its daily production as of January, Russia and other OPEC outsiders announced their own cutbacks of only hundreds of thousands of barrels.
Any Russian alignment with OPEC, whether formally or informally, would have significant implications on supply. Russia and OPEC together produce about 50 percent of the world’s crude and a jointly enacted cut would send a worrying signal to the U.S. and other major consumers, even at a time when demand for crude is declining amid the global economic downturn.
Russian President Dmitri Medvedev had triggered speculation that Russia might join OPEC, when he said last month that the country must defend its interest in an era of higher oil prices. However, Russia avoided taking the plunge into membership of the international oil cartel during OPEC meeting.
From the current conditions and circumstances, OPEC seems to be helpless and alone at present until non-OPEC producers and in particular Russia demonstrate their allegiance to it.
By Ahmed Morsy