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Oil Impasse

OPEC Losing Its Muscle

By Stanley Reed

Despite its bluster about cutting production, the cartel has been unable to marshal its members to halt oil's sliding price.

OPEC's oil chiefs were almost begging to be taken seriously on the eve of their conference in Oran, Algeria. When Saudi Oil Minister Ali al-Naimi arrived at the Sheraton, a big glass-and-steel building in the hills above the city, he told the waiting scrum of reporters that OPEC planned to cut production by a big number. Sure enough, on Dec. 17, OPEC announced cuts that amounted to 2.2 million barrels a day. Unimpressed, the market for crude drifted lower, to around $40 (€28).

This was the fourth meeting of OPEC since September. Two of them were hastily convened emergency sessions. Before Oran, the organization had announced 2 million barrels in cuts over the last three months. None of this has been enough to stem a plunge from the July peak of $147 per barrel. Despite the big cuts of Dec. 17, OPEC's hopes are modest. Its target may be $75 a barrel, but a delegate from the Gulf doubted the price would exceed $55 in the first half of 2009. "OPEC is turning into an increasingly irrelevant organization," said Sanford C. Bernstein analyst Neil McMahon on a recent conference call.

Why is OPEC's reputation taking such a hit? The market views it as having let things get out of control when prices were surging. Now the cartel can't seem to contain a downward slide, either. "I don't think they even have compliance on [the cuts] they've already done," says John Hall, a London-based analyst attending the conference. OPEC adopts production quotas for each of its members, but it rarely adheres to them. OPEC delegates reckon the 1.5 million- barrel-per-day cut announced in October reduced production by only 1 million barrels -- nearly all of it from Saudi Arabia.

The situation recalls the late 1990s when a fractious OPEC watched prices hit record lows. Today the organization is trying to present a united front, but profound differences exist. On the one hand are the Saudis and other Persian Gulf states. They are the only countries with enough production capacity to make big cuts. Yet they don't want to inflict further damage on the global economy by forcing prices too high. Then there are the hardliners like Iran and Venezuela that want sharply higher prices to support their social programs. Crude prices are well below the $100 per barrel and $86 per barrel Venezuela and Iran need to pay their bills, according to Washington consultant PFC Energy.

As OPEC strives to retain its clout, a glut is emerging that could drive prices even lower. Off Iran's Kharg Island oil terminal are seven supertankers laden with Iranian crude. Iran is storing oil on board in hopes of higher prices later, according to an industry source. Worldwide, an estimated 21 ships are holding about 40 million barrels. At the end of October there were just five. That means producers have been churning out 750,000 to 1 million barrels a day for which there are no ready buyers. With the production cuts, OPEC is simply trying to avoid swamping the world with oil.