Algeria Agreement Ramifications
OPEC member states, along with Saudi Arabia, reached agreement during the ministerial meeting in September to keep production ceiling at 32.5 to 33 mb/d.
The 14-member oil producer group produced 33.75 mb/d in September. During the upcoming OPEC Conference in Vienna, quotas are to be set for the member states.
A number of parameters have been involved in the recent historic agreement reached at the 171st (Extraordinary) meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Algeria. The decision agreed upon by OPEC member states to cut output ceiling would definitely impact energy markets in the future. In the meantime, this accord would also face certain challenges and problems that are to be discussed in this article.
It would be of high significance to study the contributing parameters.
The Algeria meeting was not the first gathering of oil producing countries for reaching an agreement on oil production reduction or freeze. But this time an agreement was reached.
The most significant factors that helped OPEC member states reached agreement are as follows:
Russia's Cooperation: Russia a non-OPEC top oil producer in the world joined the organization's initiative for reducing production. Adoption of this approach by Russia helped OPEC reach agreement that had not been achieved in the previous ministerial meetings.
Low Oil Price Impacts on Saudi Economy: Saudi Arabia's cooperation in reducing production is indicative of the destructive impacts of low oil price oil on the economy of this petrostate. The slump in oil prices slashed Saudi financial reserves from $800 billion to $450 billion, causing a big budget deficit in the Arab kingdom. Meantime, accumulation of Yemen war costs has drawn the ire of citizens in this country over austerity measures which the Saudi kingdom has imposed on people in order to make up for its budget deficit. Therefore, the decline in oil prices and its destructive impacts on the Saudi economy in recent months have forced Riyadh to reconsider its oil policy.
Saudi-US Row: When oil prices went on a sudden downward trend, many experts attribute it to an alliance between Saudi Arabia and the United States to challenge the Iranian and Russian economies and thwart regional policies of Tehran and Moscow. But at present, there is evidence of the disappearance of such an alliance. The US government has openly criticized Saudi Arabia's war on Yemen and its House of Representatives and Senate adopted "Justice Against Sponsors of Terrorism Act" which would allow American victims of the 9/11 terrorist attacks to sue Saudi citizens. These were only two examples of Saudi-US disputes that have made Riyadh think twice about its alliance with Washington. Therefore, by pursuing its oil policy, Saudi Arabia is making efforts to tell the US that it is able to challenge Washington's policies in the region if need be.
Saudi Arabia's Recognition of Iran Rightful Demand: A previous attempt in April for an agreement on oil output freeze ended in failure because of Saudi Arabia's insistence on Iran's participation in such an initiative, even before its output has reached pre-sanctions levels. But in the Algeria meeting, the Arab kingdom changed its stance with its Energy Minister Khalid al-Falih saying on the sidelines of the International Energy Forum (IEF) that Iran, Libya and Nigeria should be allowed to bring their production to a reasonable level. In previous talks, Riyadh was sticking with its position that Iran should also reduce its production. Now the Saudis seem to have been forced to recognize Iran's rightfulness in its demand for being exempted from such a freeze.
Challenges
The Algeria agreement, which was an accord between OPEC and Russia for oil production freeze, would be facing significant challenges in the future. Some of them are as follows:
Gradual Oil Price Hike: The International Energy Agency (IEA) maintains that OPEC's output has reached its highest ever level of 33.6 mb/d. In case of implementation of oil production freeze, the oil market will reach stability in 2017. That could gradually help raise oil prices in global markets.
OPEC Revival: Over recent years, OPEC has been struggling with internal disputes between its members; therefore it has failed to play an effective role in international energy markets. But the implicit agreement reached in Algeria will once more highlight the role of this organization in supporting oil producers.
Shale Oil Boom: Between October 2014 and May 2016, more than three-fourths of shale oil drilling rigs were phased out. An oil price of around $60 a barrel could give a chance to 1,200 US rigs that stopped operating to resume work. Therefore, while a decline in the oil prices had made shale oil production uneconomical in such countries as the US and Canada, a return of balance to market and higher prices could once more help upgrade the shale oil industry.
Saudi Oil Policy Shift: Saudi Arabia's oil policy has drastically changed over the past months. The shift in the Saudi oil policy bears proof to Iranian Minister of Petroleum Bijan Zangeneh’s remarks that “the oil producers that had been instrumental in the destabilization of oil markets shoulder the most responsibility for the stability of markets.” By bowing to oil production cut, the Saudi regime has realized its destructive role in global markets and now intends to make up for its past mistakes by pursuing new policies. To that effect, the Saudis would have no option but to call on some Arab countries like the United Arab Emirates and Kuwait to join the campaign for oil production cut. In a clear break from the past, the Saudis have accepted that Iran bring its output to pre-sanctions levels (around 4 mb/d), which would be a significant development in the oil policy of this country.
Iran Oil Diplomacy Victorious
By exercising professionalism and benefiting from market conditions, Iran’s oil diplomacy managed to help Iran claw back its oil market share and OPEC standing lost due to sanctions. Iran is now able to bring its oil output back to the pre-sanctions level of 4 mb/d, while it can also enjoy the advantages of oil price hike. All this comes against the backdrop of a decision by Saudi Arabia and some other Persian Gulf Arab states to reduce their production.
In general, all oil producing countries are well aware that in case oil supply does not decline sufficiently to help curb global surplus the price of this strategic commodity is likely to fall further.
The historic agreement between Russia and OPEC for cutting oil output could be viewed as a victory for oil producers and even help boost prices in the short term; however, challenges exist. For instance, OPEC member states are likely to not remain committed to the agreement, non-OPEC oil producers like Mexico, Canada and Norway may stop coordination with OPEC, some OPEC member states may have mutual mistrust, US shale oil production is likely to increase and political disputes are likely to overshadow economic benefits of these countries. In that case the hard-won agreement would face serious challenges and a stable oil price would be nothing but a dream. Meantime, it has to be noted that in case oil price is not maintained at a high level the oil output freeze plan would end in failure.
Last but not least, oil production and supply security hinges upon reasonable and fair prices and it would be recommended to both producers and consumers to strive for a stable market based on a fair price.