Algeria, which hosted the first meeting of OPEC heads of states and governments successfully in 1975 and succeeded in stemming sharp decline in oil prices in an extraordinary ministerial meeting in Oran in 2008 by cutting 4.2 million barrels from total output of OPEC, once again became historic by hosting a consultative and extraordinary meeting in its capital, Algiers, on September 28.
Prior to OPEC ministerial meeting in Algeria, it was very difficult to predict whether OPEC would reach a consensus on cutting production, but unexpectedly it was announced that OPEC had reached an agreement on cutting output, even though only in principle.
But, what was the real reason behind the agreement in Algeria?
It seems a revision in Saudi Arabia’s oil policy was the main reason for the success.
Since going ahead with market share strategy which flooded the market in 2014 and subsequently led to drastic fall in oil prices, Saudi Arabia had ignored frequent calls for considering production cut.
Market share strategy which at first was designed to drive non-OPEC producers out of the market more and less backfired and caused heavy losses by eroding the oil revenues of OPEC members, including Saudi Arabia itself which faced an approximately $100 billion in budget deficit last year.
The market share strategy led by Saudi Arabia was not completely fruitless but it failed to achieve the desired objective to push non-OPEC oil producers out of the market as expected.
As Qatar’s Energy Minister and President of OPEC Conference Mohammed Bin Saleh Al-Sada said in his opening address to the OPEC Consultative Ministerial Meeting on September 28 in Algiers: “On the supply side, in June it was anticipated that non-OPEC supply would decline by 740,000 barrels a day in 2016. In the interim, the expected decline has lessened to a contraction of 600,000 barrels a day. Moreover, we also now anticipate non-OPEC supply to grow by 200,000 barrels a day in 2017, against a decline of 100,000 barrels a day when this estimate was first announced in July.”
OPEC president’s remarks show that market share strategy has had some relative achievements but OPEC gains was very little in the face of the more than one trillion dollars OPEC members lost in the two last years.
Pursuing market share strategy, along with unrestricted oil production by Non-OPEC producers led to a glut and falling oil prices, and deprived OPEC members of fair oil revenues.
Even, losing revenues led to social unrest in some OPEC members including Venezuela which is dependent on oil revenues for more than 90 percent of its foreign exchange earnings.
The strategy showed that it was damaging the economy of member countries before it could gain more share of the market to the benefit of OPEC.
While growing number of OPEC members called for restricting output and Russia announced its agreement with a freeze output plan in order to boost prices, once again Saudi Arabia ignored the request in April in Doha, when the country insisted that Iran should take part in the freeze plan, a country that since early this year has been raising its oil production with the aim of restoring its output to pre-sanctions level of four million barrels per day.
After the failure of Doha meeting, Ali Naimi, the-then Saudi oil minister, was dismissed and replaced by Khalid al-Falih, the chairman of state oil firm Saudi Aramco. This was, although at least partly, a sign that Saudi Arabia is willing to distance itself from the old policy and go ahead with a new one.
Saudi Arabia’s new approach came to surface in the extraordinary meeting of OPEC in Algiers, where Riyadh accepted Tehran’s right to boost oil production to pre-sanctions levels of four million barrels per day in particular and cutting output in general.
OPEC’s extraordinary meeting was also a success for not only for Iran’s oil policy which insisted on exemption from freeze plan but also for President Hassan Rouhani’s initiative to start serious negotiations with 5+1 powers to lift sanctions.
Without Joint Comprehensive Plan of Action (JCPOA), which led to the lifting of sanctions, Iran’s market share would be in the hands of its rivals and Iran’s influence in the oil market and OPEC meetings was very little. Also, possibly oil prices were very high due to geopolitical tensions between Iran and the West, to the benefit of Iran’s rivals and to the loss of Iran.
By Heshmatollah Razavi