The collapse of the oil producers’ meeting in Doha was not a surprise to markets at all. Actually, nobody expected much to come out of it, though, for many weeks before the meeting, all major producers — Organisation of Petroleum Exporting Countries (Opec) members and non-members — were talking about the need to freeze current production levels to stabilise the oil market. All producers and exporters are hurt by low oil prices, especially those who rely on energy exports revenue as a main source of national income. So, it might be really odd to think that anyone wouldn’t have wanted the Doha meeting to succeed — at least to stop the price decline or even prop it up.
When the price of oil dropped sharply in June 2014, far-fetched analysis swept the media, mainly squaring the drop on a Saudi policy to punish others. Some said that Opec scraped production ceiling, pumping more oil at a time of depressed demand to push prices down on purpose. The reality was that Opec members favouring to manipulate the decline in prices wanted to cut production ceiling, while Saudi Arabia, the largest producer in Opec, was reluctant to lose its market share for the sake of other producers who rely on Saudi sacrifices — shouldering the bulk of any cuts. The supply couldn’t be blamed only on Saudi Arabia, as other Opec producer along with big producers from outside Opec are pumping at full thrust. Russia increased output and the American shale oil turned United States a net-exporter of oil for the first time.
At a time when everybody is increasing output, disregarding market essentials, it was difficult for the Saudis to satisfy others on its own expense. Arguing that Saudi Arabia is flooding the market with crude to take the prices down, so Russia can feel the pain and change its position on regional issues — for example, the Syria conflict — was not plausible as both Riyadh and Moscow are coordinating to stabilise oil market. Some added that the intended Saudi action was meant to preempt the Iran agreement with world powers on its nuclear programme, depriving the Islamic Republic of the benefit of increasing oil output and thus increasing revenue. All those talking about the “politics” of oil production didn’t count that the Saudis are also losers, along with their allies, from a price drop.
Other analysis was more focused on oil market, and less “politicised”, claiming that Opec flooded the market to drive shale producers out of the market. With the average cost of producing a barrel of shale oil more than four-fold the cost of producing a barrel from traditional wells, shale producers suffered more from price drop. But shale production didn’t stop, and some were ignoring the fact that some classic producers are already investing in shale production in North America. The reality was that shale producers were already working before on cutting the cost by technological developments and learning lessons from earlier drilling. Another fact is that shale production investment is almost upfront, so wells keep producing with any revenue considered return. Now, with prices drop seems to have bottomed and an upward trend is expected, shale producers promise to regain strength with $40 (Dh147.12) a barrel.
Yet, you can’t completely dismiss politics from oil market; and for that matter from any market. But even if any of the above conclusion were right at any point in 2014, it didn’t last. Politics of oil market since then were mainly ‘market factors’, give or take a small percentage fluctuations due to “sentiment”. If there’re politics, it’s mainly those of emerging markets losing economic growth momentum and consequently suppressing global demand. In addition, some producers had to increase output to make-up for loss of revenue due to lower prices. Market destabilised and it went into a sort of vicious circle. Now, everybody seems to realise that the trend needs to be averted for the good of all: Producers, Opec, non-Opec, shale and consumers — and ultimately for the good of global economy suffering other ills already.
Now, most of the reporting and analysis of the Doha meeting blamed the collapse of it on “Saudi Arabia refusing to sign for production freeze unless Iran joins force”. Shyly, we hear the fact that Iran didn’t even attend the Doha meeting. That means the Iranians actually blew the meeting up in advance. No one would expect major producers, including Russia, to lose their market share only to create a ‘supply window’ for Iran, so it can increase its exports. Making up for Iranian loss during sanctions’ years is not the responsibility of its fellow-and-gas producers. Moreover, a production freeze agreement wouldn’t have taken the two million barrels per day (bpd) excess from the market. Rather, it’d have prevented between 300,000 bpd and 500,000 bpd more oil from coming into the market. That’s what Iran needs to increase, and the market will be left imbalanced with more than two million bpd of supply over demand.
The business aspect is actually more than the political one when it comes to global oil market activity, though the economic impact will definitely instigate political consequences.
Dr Ahmad Mustafa is an Abu Dhabi-based journalist.