x Abu Dhabi, UAEWednesday 17 January 2018

An unnecessary price spike due to Opec politics

Opec's recent meeting failed to reach an agreement, and led to a short-term price spike. It is apparent that the politics within the grouping are working against its own members' interests.

In a speech in April marking the 50th anniversary of the founding of the Organization of Petroleum Exporting Countries, its secretary general Abdalla el Badri reminded the 12 member states of Opec's initial purposes: "To safeguard their legitimate national interests and to ensure order and stability in the international oil market."

This week's meeting suggests that the two goals are increasingly difficult to reconcile. The "national interests" of some states, notably Iran, Venezuela and Libya, often diverge sharply from what many consider to be the best interests of the rest of the world. And the deadlock over production plans has only reduced the order and stability of an already-volatile world oil market.

Almost everyone agrees that the fragile global economic recovery cannot withstand an "oil shock" just now - and yet prices have been hovering above $110 per barrel. Both economics and common sense suggest that it is time for Opec to increase supply, thus easing prices, which among other benefits would help to rein in speculation.

The world economy is not a zero-sum game; sharply higher oil prices could lead to a renewed global slump - meaning lower demand and prices for oil - in years to come. By any enlightened medium or long-term view, what Opec members need is steady economic growth worldwide, which in turn creates political and economic stability.

Opec's failure as a group to grasp this obvious point stems from both technical and political divisions within the group. Only Saudi Arabia has substantial excess pumping capacity at present; for other members a lower price would simply mean lower revenue.

There are also political tensions, not only in Libya - where oil production has virtually stopped - but also between Iran and Saudi Arabia, for example. Various frictions and tensions in the Mena region and beyond make Opec harmony a real challenge.

There are also troubling questions about how much a production increase would help moderate prices, and for how long. Morgan Stanley, for example, recently estimated that global spare capacity will be used up by 2014.

The world has enough long-term energy challenges; a short-term one seems irksome because it is avoidable.

This is a time for all of Opec's members to take a deep breath, think longer-term thoughts and understand that producers' interests ultimately coincide with those of oil consumers.