Last Updated: Thu Jun 30, 2011 15:57 pm (KSA) 12:57 pm (GMT)

Mary E. Stonaker: Economic WMD? US fears OPEC’s next move after shocking display of disunity among cartel members

Saudi Arabia prefers oil prices for its budget to be around $50-55 per barrel unlike Iran which is basing its oil prices for its 2011/12 budget at around $81.50 per barrel. (File Photo)
Saudi Arabia prefers oil prices for its budget to be around $50-55 per barrel unlike Iran which is basing its oil prices for its 2011/12 budget at around $81.50 per barrel. (File Photo)

Three weeks after OPEC’s shocking display of disunity over oil pricing, mainly an argument between long-time foes Saudi Arabia and Iran, the daily basket price has increased to $103.59 per barrel on 28 June, up from $101.56 the previous day. This is still significantly lower than recent peaks of S113.59 on 14 June and 120.91 on 28 April. US fears sparked a significant drop in oil demand in the US, alleviating some, but not all, upward pressure on oil prices.

Recent announcements of US emergency stockpile sales and resumed drilling in the Gulf of Mexico echo this line of attempting to lower prices as well as reduce dependency on foreign sources. However, recent reports of storage space disappearing quickly and surplus supplies also contributed to US President Obama’s announcement.

If overfilled, underground storage in the US – currently holding around 727 million barrels – will leak oil into the soil surrounding it, which will eventually lead to an environmental disaster. While announcements to release stockpiled oil nicely coincide with OPEC’s disagreement, talks to this end were taking place well before this month.

OPEC’s monumental deviation from unified policy making occurred at the Vienna meeting in early June; OPEC members gather regularly to discuss production rates and adjust quotas.

Saudi Arabia and its allies within the 12-member OPEC want to increase production quotas to increase supply available and hence, lower prices.

The end game of this tactic is quite simple – moderate prices discourage OPEC’s customers (including the US) from investing more in renewable energies which prevents any major shifting away from petroleum product consumption.

Iran and its allies, however, have suffered from sanctions, and inadequate infrastructure development, leaving them eager to maintain higher prices and higher revenues, even if it is just for the short term.

The series of events threatening disruption to oil supply flows cause Americans to flashback to the early 1970s when an oil embargo, barring oil shipments from OPEC members to the United States, caused quadrupling of prices for two years. It was, until that point in history, the worst economic downturn of the US since the Great Depression of the 1930s.

In the 1970s, the OPEC embargo was equivalent to an economic weapon of mass destruction (WMD). The world was wholly unprepared for such a move from the developing South – including OPEC countries -- which supplied energy products to the developed North – the US, Canada, Western Europe and Japan.

Present-day American fears stem from the knowledge that oil prices can be controlled by some fair-weather friends, including Saudi Arabia, Iran, Venezuela, and Libya.

OPEC is in possession of an economic WMD today, with the ability to manipulate approximately 49 percent of the world’s oil production and 79 percent of the world’s total proven oil reserves of 1.3 trillion barrels. A single orchestrated move could spell disaster for much of the world.

The recent uprisings have encouraged non-OPEC members to explore their options, exactly what Saudi Arabia was trying to prevent.

Approximately 90 percent of Saudi exports are oil and gas, and related products. As such, the stability of the Saudi government depends on the ability to maintain its economic WMD in its back pocket. That is, the ability to control the decisions of OPEC, once thought to be an instrument of the Saudi regime.

The very public rift, called “one of the worst meetings ever” by Saudi Arabia’s Oil and Energy Resources Minister, Ali Bin Ibrahim Al Naimi, signalled the weakened position of Saudi Arabia in the world market via OPEC, or in other words, the weakened destructive power of Saudi’s potential economic WMD on the global markets.

The destructive nature of the economic weapon has further been slightly diminished, as new North American pipelines open. In addition, excess refinery volumes give Americans a few layers of protection from the still massive destruction an OPEC economic move of aggression might cause.

Iran has been targeted with sanctions for decades, with regular additional sanctions creating tighter spheres in which they may operate. Allowing the prices to skyrocket would not only benefit the national treasury of Iran, it would also give them an economic hold over North American and European countries.

The next OPEC meeting is scheduled for December, a long way away in a region experiencing major changes almost daily. What that means for the amount of oil supply available to the world markets is yet to be seen though it should be watched closely.

Saudi Arabia has already decided to increase its production rates, regardless of the stalemate at the OPEC meeting.

Americans have taken significant steps to prevent OPEC’s destructive abilities through the use of economic WMDs such as sudden supply restrictions and sky-high prices, though that does not mean they are entirely economically immune to the ongoing events in this turbulent region.

(Mary E. Stonaker is an independent scholar, most recently with the Middle East Institute, National University of Singapore. She can be contacted at marystonaker@gmail.com)

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