opec faces mounting questions about its credibility and relevance after Wednesday's group meeting broke up in disarray with no decision on raising production—despite widespread fears that higher crude prices were endangering the world economy.
OPEC faces mounting questions about its credibility and relevance reaching no decision this week on raising production despite widespread fears that higher crude prices were endangering the world economy. Guy Chazan has details.
The meeting, the first since the start of the Middle East pro-democracy movements known as the Arab Spring, exposed deep divisions between members of the Organization of Petroleum Exporting Countries that some say can't now be healed.
All eyes are on Saudi Arabia, which has said it would move unilaterally to increase output. That statement—from the only OPEC member able to add significant barrels of production—only underscored doubts about the cartel's relevance.
Perhaps the only thing that could force the 12 cartel members to overcome their differences and act would be a new big oil-price shock. "Maybe we need to see oil at either $50 or $150 a barrel for them to figure out that they've got to get to grips with the situation," said Adam Sieminski, chief energy economist at Deutsche Bank. "There's a saying about OPEC, that it's like a tea bag—it only works in hot water."
The conclave in Vienna, described by Saudi Arabian oil minister Ali Naimi as "one of the worst meetings we've ever had," was the first since war in Libya knocked out most of that country's oil production. Largely as a result of the Libyan shortfall, OPEC basket prices have averaged $106 a barrel this year, $29 more than the 2010 average, and consumer concerns about high gasoline prices are growing.
Many were hoping OPEC would seek to calm markets by replacing the lost Libyan output. But Gulf states led by Saudi Arabia, which had been pushing a 1.5 million barrels-a-day production increase, were blocked by Iran, Venezuela and others who feared that would lead to a collapse in oil prices.
With the next meeting of the group scheduled for December, some analysts fear there is now nothing to prevent a run-up in prices similar to the surge that took crude to $147 a barrel in the summer of 2008—especially, they say, as oil demand is expected to rise sharply in the second half of this year.
"There ain't no sheriff in this town, or at least there will not be for at least another six months," said Barclays Capital analyst Paul Horsnell. "OPEC has for the moment been removed as a force for moderating prices on the upside."
OPEC has traditionally sought to stabilize markets by adding barrels of production when prices are too high and subtracting them when prices fall. Some analysts said Wednesday's meeting showed the group was failing in this task, undermining its claim to be a guarantor of market stability.
"They've showed they are only interested in defending the downside," said David Wech, head of research at JBC Energy in Vienna.
Part of OPEC's credibility problem is the fault-line that has opened up between Iran and Saudi Arabia. OPEC historians say the recovery in the group's effectiveness in managing markets in the aftermath of the oil price crash of the late 1990s was largely due to a rapprochement between Riyadh and Tehran.
That relationship has now been damaged by the Arab Spring. Gulf countries have accused Iran of stirring unrest in Bahrain and other countries in the region. Iran was in turn angered when Bahrain's Sunni rulers invited a Saudi-led force to support the suppression of protests by the Gulf state's Shiite population.
The political upheavals in the Middle East over the past few months were reflected in the makeup of Wednesday's meeting, where the delegation heads of Iran, Iraq, Kuwait, Qatar and Libya were attending their very first OPEC conclave. The new ministers, some under pressure from their political paymasters back home, lacked the experience and negotiating skill of veterans like Mr. Naimi.
Yet some analysts underplayed the geopolitical splits within OPEC, saying the dispute between the two camps was less about how to handle the oil market than about the appropriate time to increase production. One analyst said Iran had a point that market statistics didn't necessarily support the need for an immediate output boost.
"Even on fundamentals, the case for an increase was not a slam dunk," said Mike Wittner, head of commodities research at Société Générale. He noted the buildup in oil inventories in the U.S., Europe and Japan in April and the collapse in oil demand in the U.S., which suggested the world may not actually need more crude right now.
OPEC watchers said it was misguided to suggest the organization was about to break up. "This isn't a divorce—it's a trial separation," said David Kirsch, an oil-market analyst at consultancy PFC Energy. "And in the end, everyone will come to their senses and realize their differences are reconcilable."
Write to Guy Chazan at guy.chazan@wsj.com
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