Iran's alliances with other OPEC members to help countering Saudis' influence on oil prices

Iran's alliances with other OPEC members to help countering Saudis' influence on oil prices

Azerbaijan, Baku, June 28 /Trend T.Konyayeva/

To counter the influence of Saudi Arabia on oil prices, Iran is better to rely on alliances with other OPEC member-states, said Doctor Hassan Hakimian, Director of the London Middle East Institute, SOAS, University of London.

"Saudi Arabia is the largest oil producer within OPEC and the largest oil exporter in the world, and Saudis can play a significant role in the oil markets as they have done so in the past. Saudi Arabia is known widely for its role as a "swing producer": it can influence oil prices through its production and export levels," Hakimian told Trend by phone. "On its own Iran accounts for something like 5 per cent of world's oil production. Saudi Arabia accounts for about 12 per cent. So, Iran will have to rely on alliances with Algeria, Venezuela and possibly others to fight an upward revision of member states' quotas."

Tehran would strongly confront any possible move by the oil producing countries to affect market prices, Iran's caretaker oil minister Mohammad Aliabadi said on June, 22 alluding to Saudi Arabia surplus production which faced the strong protest of the OPEC members in the last ministerial meeting of the cartel in Vienna.

Aliabadi whose country holds presidency of the Organization of Petroleum Exporting Countries (OPEC) further described maintenance of the current production level by the OPEC members as the bloc's only weapon to control the prices, and reiterated, "We do not allow anyone to play with our national interests."

Earlier, on June 22, Saudi Prince Turki al-Faisal warned that Riyadh could seek to supplant Iran's oil exports if the country doesn't constrain its nuclear program, a move that could hobble Tehran's finances, The Wall Street Journal reported.

Prince Turki, a former Saudi ambassador to the U.S. and U.K., also said Saudi Arabia is preparing to employ all of its economic, diplomatic and security assets to confront regional ambitions of Iran which "is very vulnerable in the oil sector, and it is there that more could be done to squeeze the current government."

According to Hakimian, tension within the OPEC has increased recently partly as a result of developments in the international oil markets and partly as an aftershock to so-called "Arab Spring".

"In particular, we see greater tension between Saudi Arabia and Iran as manifested in the rather acrimonious last meeting of the OPEC Secretariat in Vienna earlier this month," he told. "As we know, the Saudis failed to steamroll their planned increase in production quotas to moderate the oil prices. In this meeting, Iran managed effectively through its alliance with Algeria and Venezuela to scupper the plan as this group of countries does not have spare capacity and will not benefit from such increases in production ceilings."

During the latest OPEC's ministerial meeting in Vienna on June 8, Saudi Arabia tried hard to convince the member states to demand changing oil production limits that have been in place since 2009, but it failed. Many countries stood up to Saudi's measure except for the United Arab Emirates and Kuwait that later refrained from entering talks. Iran, Ecuador, Venezuela and Angola and some other countries opposed the Saudi move.

After ministers were unable to reach consensus to raise crude production, the oil exporting bloc has decided to maintain output levels, with the option of meeting within the next three months to discuss a production hike.

Hakimian believes it is necessary to distinguish between official quotas and actual oil production levels.

"While OPEC members do not like to admit, production levels are quite different," he said. "At the moment, most OPEC members, with the exception of Libya, whose production has been adversely affected by the civil war, are producing at actual outputs which exceed their agreed quotas (a deviance that is commonly referred to as 'cheating')."

In May OPEC pumped 29 million barrels a day of oil (including Iraq, which is not in the quota system) whereas official quotas, last formally changed in 2007, stand at 24.8 million barrels a day.

Hakimian mentioned that Saudi Arabia is believed at the moment to be producing at about 9 per cent above quotas and making up for the reduction in Libya's output.

"The tension mentioned above is not only reflected over official quotas, which can be to some extent irrelevant when demand is strong. My feeling is that, given the current strains, these official quotas will probably not be revised until a consensus of some sort can emerge. The real fight will therefore be over actual production or output levels. Saudi Arabia has a significant reserve or spare capacity, which it can use to push down oil prices, if necessary," he said.

Saudi Arabia, OPEC's biggest producer, possesses 20 per cent of the world's proven petroleum reserves and ranks as the largest exporter of petroleum. The petroleum sector accounts for roughly 75 per cent of budget revenues, 45 per cent of gross domestic product, and 90 per cent of export earnings.

Iran, the group's second-biggest producer after Saudi Arabia, has historically taken a hard line on oil prices, and its OPEC Governor Mohammad Ali Khatibi said on June 6 that his country would argue against raising output because "there is no need to increase production" at this time.

Saudi Arabia has about 3.5 million barrels spare daily oil production capacity that has not been used so far. Currently, Saudis are producing about 9 million barrels a day which is about 1 million above its official quota and leaving it another 3 million barrels a day of spare capacity.

Prince Turki said in his speech that Saudi Arabia could easily offset any reduction of Iranian oil exports. "To put this into perspective, Saudi Arabia has so much [spare] production capacity that we could almost instantly replace all of Iran's oil production," the prince said.

As to Saudi Arabia's ability to use oil as a weapon against Iran, Hakimian underlined that in the mid 1980s, Saudi Arabia exploited its role as a "swing producer" very effectively to push down oil prices: by flooding the market in December 1986 oil prices fell below 10 dollars.

"Saudi Arabia therefore has enormous muscles, especially in the short term to affect oil prices," he told. "In the long term, we have to remember that such a policy can be self-harming to Saudi Arabia too if oil prices crash too far and it is not likely to be very popular with other OPEC members either. Non-OPEC members like Russia have to be factored into the equation as well, even if indirectly. I don't think that Russia will be too happy to see Saudi Arabia pursuing the policy of lowering oil prices too far."

Hakimian believes that ultimately OPEC will thrive - or fail - through its ability or inability to maintain cohesion and unity among its diverse members, something it has managed to do against the odds over the last few decades.

"As we know cooperation is much better than competition, and this is no exception," he concluded.

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