This weekend, 13 countries with little in common will attempt to act as one – by coming to an agreement to curb oil production and prop up prices.
But the quarrelling members of the Organization of the Petroleum Exporting Countries, who meet Sunday in Doha, Qatar, have been acting less like a cartel and more like observers to a free market in crude oil. And the odds of the group reaching anything more than a fragile agreement to “freeze” output at current levels are slim.
Given the nature of the 46-year-old cartel, it’s no wonder. Two of the group’s members – longtime foes Iran and Saudi Arabia – are backing warring proxies in Syria and Yemen. Countries like the United Arab Emirates have fiscal buffers against low oil prices, while cash-strapped inflation-riddled Venezuela is scraping to avoid default. Nigeria counts on 1.7 million barrels a day to help meet the needs of 173 million people while Kuwait produces 2.8 million barrels a day with a population of 3.4 million.
Decades ago, there were effective cartels that managed notoriously unstable oil prices. Standard Oil, before it was broken up under antitrust laws, leveled off prices in the late 1800s and early 1900s. And from the early 1930s through 1970, the Texas Railroad Commission dictated output well by well in Texas, effectively taking available crude oil off the market to bolster prices at a consistent, albeit high, level.
These two price setters had a key advantage OPEC lacks. Standard Oil executives could make decisions around the breakfast table of founder John D. Rockefeller. And the Texas Railroad Commission did not have to negotiate with rival states or countries with differing interests.
OPEC, by comparison, is a fractious lot whose members want the others to cut production without cutting themselves. Usually that means cuts by Saudi Arabia, which has usually taken on the role of swing producer. But the kingdom is tired of losing market share while other oil exporters cash in and for the past year and a half it has been pumping at high rates, willing to persist even as prices crashed from more than $100 a barrel two years ago to $40.34 a barrel Friday.
Still, oil and gas investors around the world are looking to the meeting this weekend for an agreement that would trim, or at least freeze, output and prop up prices. OPEC “basket price” – which takes into account the quantity and quality of members’ exports – has jumped about 12 percent in the past week.
That jump is also partly because of the approach of the summer driving season, the part of the year when demand for oil is greatest. Given the time needed to ship and refine crude oil, summer in the crude oil trading world is almost here. In addition, with low oil prices recently, short sellers – traders betting on falling prices – have been buying oil to liquidate their positions and cut their exposure.
Many experts doubt that an agreement limiting OPEC production is possible. “We cannot know the outcome but if there is to be a production freeze, rather than a cut, the impact on physical oil supplies will be limited,” the International Energy Agency said in its monthly report on Thursday.
The Saudis, producing at near-record levels, show no sign of relenting. Iran, recently liberated from economic sanctions as a result of the nuclear deal with the United States and other world powers, is cranking up its production. Iran is currently producing 400,000 barrels a day more than it was at the beginning of the year, according to the IEA. Other nations, desperate for revenue, also want to keep output high.
Saudi Arabia has reached out to Russia, primarily to discuss the war in Syria but also to discuss oil. Russia is also producing oil at near-record levels, but top officials said earlier this week that Moscow is not contemplating cuts.
“Clearly Saudi Arabia needs the money and so does Russia,” said Kenneth Rogoff, an economic professor at Harvard University. “Russia is really hurting. The standard of living has plummeted and if it lasts that will eventually undermine [Russian President Vladimir] Putin’s poplarity no matter how effective his propaganda.
“But Saudi Arabia has its failed war in Yemen, gigantic population growth and all kinds of internal political problems. So neither place is in a fantastic position to cut back.”
Instead, OPEC policy for the past year and a half has been to produce as much as possible, watch prices sink, and wait for oil demand from a rejuvenated world economy intoxicated by low oil prices to catch up.
“Now no one is managing the oil market,” said Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy. “It’s a free market.”
That free market is producing low oil prices that are hurting production not in Saudi Arabia – where production costs are less than $10 a barrel – but in the United States, where shale oil output has started to plunge. Because shale wells produce most of their oil in the first couple of years, a steady pace of drilling is needed to keep production up. But with low prices, the drilling rig count is down about 80 percent and total U.S. output has dropped from 9.6 million barrels last year to less than 9 million now and will likely fall further to about 8.3 million barrels a day later this year.
How fast U.S. shale oil production can bounce back once prices start climbing again isn’t clear. But Saudi Arabia is going to wait and find out. And Bordoff said OPEC may yet take some action.
“I think that maybe assuming some freeze gets announced in Doha,” he said, “even though a freeze is a modest step, it shows that these countries can come together and reach agreement and in the future they might be able to come together and do something significant.”