x Abu Dhabi, UAEWednesday 17 January 2018

It took a recession to help break the ice

Analysis: The world recession may have wrought a rapprochement between Opec and the world's biggest energy consumer.

Motorists line up for fuel during the 1973-74 oil crisis: such events are hopefully a thing of the past as the US and Opec forge greater cooperation.
Motorists line up for fuel during the 1973-74 oil crisis: such events are hopefully a thing of the past as the US and Opec forge greater cooperation.

VIENNA // The world recession may have wrought what once seemed impossible: a rapprochement between the group controlling 40 per cent of global oil supplies and the world's biggest energy consumer. The US and OPEC have been at odds for at least the past 35 years, ever since the oil exporters' group set out to raise world oil prices to try to stabilise its members' real incomes. At the same time, Arab oil exporters, including some key OPEC members, imposed an embargo on the western allies of Israel in that country's Yom Kippur war against Egypt. Americans never forgot having to queue for petrol, a fuel that many equated with personal freedom, in the 15 months of the 1973-74 Arab oil embargo.

The concurrent US stock market crash and the period of high inflation that immediately followed were equally painful. Rightly or wrongly, most Americans at the time blamed OPEC and passed that attitude on to their children. The plan for US energy independence that Henry Kissinger, then the US secretary of state, unveiled in Feb 1974, resonated last year in Barack Obama's campaign for the US presidency.

Before his election last November, Mr Obama called for the US to reduce its dependence on oil imports. Meanwhile, OPEC members became increasingly affronted by the apparent American sense of entitlement to the oil resources of developing nations, and by US indifference to the pernicious effects of persistently low crude prices on oil exporters' economies. These were factors that fed the rise of anti-western militancy in a number of Muslim states.

But now, with Mr Obama's presidency reflecting a widespread American desire for improved foreign relations, the ice may finally be melting. "We can see a different tone," Abdalla el Badri, the OPEC secretary general, said on Monday at the group's headquarters in Vienna. "Now we are seeing positive signals, people that would like to talk, people that would like to communicate, to have dialogue, and this is really encouraging us.

"The US should not see us as an enemy." The OPEC chief's uncharacteristic comments followed the group's decision the previous day to leave its oil production ceiling unchanged - something the US had requested. With minimum dissent, according to Dr el Badri, OPEC's gathered ministers instead agreed to focus on removing up to 800,000 barrels per day (bpd) of crude supplies from the international market by insisting on compliance with existing output quotas that some of its members had been flouting.

OPEC is to meet again on May 28 to review the success of this approach and reassess its options. In the week before Sunday's meeting, analysts made much of the mixed signals from OPEC officials regarding members' support for another cut, on top of the record 4.2 million bpd of supply reductions announced last year. That reinforced a widespread perception of the 12-nation group as deeply divided. But presented with the extraordinary economic consequences riding on their decision, the ministers quickly reached a consensus, Dr el Badri said.

"It was an easy decision," concurred Sheikh Ahmed al Sabah, the Kuwaiti oil minister, who had earlier pressed for another cut. Last-minute lobbying of OPEC by Steven Chu, the US secretary of energy, who argued that the fragile world economy could not absorb a sharp rebound in crude prices, may not have directly affected the group's decision-making process. But the legitimate concerns articulated by top US officials over prospects for global economic recovery may have had an important indirect influence.

Dr el Badri said for the record that OPEC reached its agreement independently and was not pressured by Washington. He said a telephone call on Friday by Mr Obama to Saudi Arabia's King Abdullah had no bearing on the OPEC meeting. The White House said the call was to discuss arrangements for an upcoming Group of 20 leading economies summit in London that both leaders planned to attend. Indeed, the influential Saudi oil minister's repeated insistence that OPEC members adhere closely to their quotas pre-dated the US president's call to his boss.

That suggests the interests of the US and OPEC's biggest oil exporter were already closely aligned, with both seeking to remove impediments to global economic recovery. Washington wants to see the rising US unemployment trend reversed, and for flagging US industrial activity to pick up. Saudi Arabia wants the same, as it would stimulate oil demand and encourage long-term strengthening of oil prices.

And with its spare crude oil production capacity enhanced by the 1.6 million bpd by which it has cut its oil exports in the past six months, the kingdom is uniquely positioned to impose its will on any oil exporters, within or outside OPEC, seeking a fast boost to crude prices. The world's biggest oil exporter could at any time easily open its taps to bring prices back to earth. OPEC has not abandoned its position that a stable oil price of about $75 a barrel is needed to attract the long-term investment required to ensure the world remains adequately supplied with oil.

Dr el Badri suggests this might also suit Mr Obama's agenda of encouraging the development of domestic low-carbon energy alternatives, which so far do not come cheaply. But the much-desired smooth transition to a new world order free from energy uncertainty and further price shocks cannot be achieved unless the US and OPEC from now on work diligently to accommodate each other's legitimate economic aspirations.

That will indeed require an unaccustomed dose of dialogue to bridge a yawning cultural divide. For the world's sick economy, that could be just what the doctor ordered. tcarlisle@thenational.ae