Iran-Saudi Conflict of Interest in OPEC

19 December 2012 | 00:05 Code : 1910551 Interview General category
An interview with Saeed Leilaz, an expert on international economy
Iran-Saudi Conflict of Interest in OPEC


In the recent OPEC meeting, the issue of the production ceiling was again discussed. This is while the production ceiling has never been observed by member countries. What is your assessment of this meeting? Why do the countries not feel committed to this ceiling?

To evaluate this meeting, we must first study the principles of political science and the geopolitical issues of the world. From the outset of its formation, OPEC has always been faced with this problem. Since 1963 when this organization, the Third World’s only cartel, was formed, and following the Arab-Israeli war in June 1967 which enhanced the importance of oil, and later when oil became a political good especially after World War II, OPEC has always had two factions: the radical faction or the hawks, led by Iran, and the conservative faction or the doves, led by Saudi Arabia.

Since OPEC is comprised of different countries in three different continents with different social, economic, and political structures and even different oil, it is natural that this cartel would not be able to reach an agreement on a decision; hence, the member countries would not be committed to it. The oil situation in these countries, in terms of quality, the amount of investment, production capacity, processing power, and the role oil plays in the domestic gross production of these countries, is so different that it is impossible for these countries to be able to reach a detailed final conclusion with regard to production. Furthermore, the different political and geopolitical positions of OPEC member countries must also be considered. These positions range from the views of Hugo Chavez in Venezuela to King Abdullah of Saudi Arabia and those of Indonesian officials. Thus, OPEC, in its fifty years of activity, has never been able to reach lasting solidarity with regard to the issue of production, and it will never be able to. The fate of the recent meeting is no different. If it is the interests or financial possibilities or capacities or investments of a country which run it, it will never limit itself to the production ceiling.

In general, it seems that unions that are formed around one product cannot reach their goals. OPEC is not an exception to this rule. Production capacity has never been observed in any single year. When setting a target for oil production, all countries, whether member or non-member, consider their own interests and limitations, not their official commitments to these types of organizations.

How will these political, social, and economic differences of OPEC member countries impact the ineffectiveness of this organization?

When it is said that the oil price should rise, countries like Iran or Nigeria or Venezuela seriously need the financial resources resulting from this increasing price, but Abu Dhabi or Saudi Arabia for example do not need these resources at all. If the production ceiling is lowered, then a country like Algeria, which has limited oil resources, welcomes this proposal, because the current trend may push him out of the circle of oil producers within the next two decades. But for a country like Saudi Arabia or Kuwait or the UAE, a reduction in production in order to maintain oil reserves would be meaningless. Therefore, since the political, economic, military, and security conditions of these countries are different from one another, each one has its own set of goals, thus, these differences will cause OPEC to be considered as one of the less effective cartels of the world.

If OPEC is faced with structural problems which prevent it from reaching its objectives, then what is the benefit of its existence?

Although these political, economic, and social differences have never in the past allowed, and will never in the future allow, a cartel like OPEC to become an efficient one, it cannot be said that the non-existence of OPEC would be better than its existence. In any case, OPEC meetings and their decisions impact global markets.

How do you evaluate the role of Arab oil exporting countries in defining and implementing OPEC’s policies?

Due to their solidarity, the Arab oil exporting countries have been able to make decisions better than OPEC and, until now, it has been these countries that have directed the market. Due to mismanagement in domestic economy and a strong dependency on oil revenues, countries like Iran and Venezuela, which are the leaders of OPEC’s radical faction, have not been able to control the oil market. They have not sufficiently invested in this regard either. Right now, Iran is not allowed and does not have the possibility to impact this market. But the collection of OPEC’s Arab member countries, meaning Iraq, Saudi Arabia, Kuwait, the UAE, and Qatar, have been able to impact the world’s oil economy more than other member countries.  

What is the difference between Iran’s demands from OPEC and those of the Arab countries?

Due to its need for financial resources, Iran supports raising prices and reducing production. On the other hand, due to the reduction in its capacity and problems with its production capacity, Iran cannot produce more than 3.5 million barrels a day, hence, it demands a reduction in production. Furthermore, because of the international sanctions imposed against Iran and attempts to neutralize their consequences, Iran wants the production ceiling to be lowered. Iran’s dependency on oil income has reached a point where if oil is sold at less than 95 dollars and exports reach less than two million barrels per day, it will be faced with serious problems.

Exactly on the opposite side are the UAE, Kuwait, Saudi Arabia, and Iraq. The more these countries produce and sell oil, with any price above 60 dollars, the more profitable it will be for them. For example, Saudi Arabia has almost 15 billion dollars surplus each month, which in a year would be equal to the export of 1.5 billion barrels of oil at a price of 100 dollars per barrel. It means that if Saudi Arabia lowers its production ceiling to 5 million barrels per day, it will not be faced with a deficit. Therefore, Saudi Arabia has a surplus equal to 13% of its gross domestic product. On the opposite side, we can consider Venezuela which has a 15% deficit in relation to its gross domestic product.

It seems that Iraq seeks to play a new role in OPEC. How will this role, in your opinion, be defined?

With its investments in the oil industry, Iraq has been able to increase its production to the extent that, for the first time since last June, it is producing more oil than Iran. Iraq will soon be considered as a very important player in the scene of determining the oil price. Of course, my prediction and hope is that Iraq assumes the leadership of the radical faction in OPEC. Due to its different political, social, and economic structure, Iraq will not be placed in the division of other Persian Gulf Arab countries.

What is the role of the Secretary General in setting OPEC policies?

The Secretary General is a subsidiary of the geopolitical mathematics governing the member countries and it is natural that the country which holds more power appoints the Secretary General. Incidentally, since the position of the Secretary General is not very important, the oil producing Arab countries do not insist that the Secretary General be from one of these countries. The countries which are effective in the appointment of the Secretary General are solely against Iran and Iraq taking this position.

What would happen if Iran or Iraq were appointed?

If the Secretary General is selected from Iran or Iraq, then they will be faced with a minor political defeat and even this is not tolerable for them.

The idea which some propose is that it is in the collective interest of all countries to raise the price of oil and this is the only solution through which countries can be encouraged to observe the production ceiling. Why are these collective interests not important for some countries?

I do not agree with the assumption made in your question. Saudi Arabia has a clear reasoning and that is that if the price of oil goes beyond a certain limit, then investments in Europe, the US and in US shores which are currently not beneficial, will then become profitable and the number of competitors will increase. If OPEC’s oil income grows, it will not be beneficial for some countries due to geopolitical reasons. When Saudi Arabia can run the country with 60 dollar oil, but its biggest competitor in the Middle East, Iran, can be faced with problems even with 90 dollar oil, then the growing price of oil will not be to the benefit of the Saudis.   

tags: opec iran saudi arabia iraq

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