Saudi-Iranian tension results in stalemate at Opec talks and non-member Russia upsets the equation
Members of the Organisation of Petroleum Exporting Countries (Opec) have vowed to reach a deal to curb global oil output by the end of the year, after talks this week failed to produce an agreement on how to stabilise falling prices.
But with the political and military confrontation between Saudi Arabia and Iran showing no signs of abating, the chances of a deal remain slim.
Global oil prices have tumbled from a high of US$120 per barrel in early 2014 to an average of under US$50 now. And while there have been swings in energy prices before, what is unusual is that the current dip has lasted for more than two years, and market analysts do not expect a serious revival in prices for some time to come.
The reasons for the price collapse vary - from a tailing-off in China's economic growth rates which means less demand from the world's most voracious energy consumer, to the transformation of the United States into a net exporter of energy products and the advent of new energy-saving devices.
Either way, the International Energy Agency estimates the "supply overhang", namely the difference between what is produced and what is consumed, at around 1.5 million barrels per day (bpd), and the agency's executive director Fatih Birol predicted this week that the glut will get even bigger as oil demand remains "weaker than many thought".
All oil-producing nations are suffering. Venezuela is bankrupt, with almost no consumer products or food available in the nation's shops. Russia's economy has languished in recession for the past two years. Even wealthy Arab states are feeling the pain; Saudi Arabia has just slashed bonuses for state employees as well as subsidies for all consumers, unprecedented moves in a nation which relies on lavish financial grants to maintain popular support for the ruling royal family.
The obvious answer for oil nations is to agree on a cut in production in order to stop the fall in prices. And the obvious institution for this purpose is Opec, which was created in the 1960s precisely in order to coordinate production levels. But, as this week's fruitless Opec meetings held in Algeria indicate, the obstacles to a consensus on cutting production remain formidable.
To start with, Opec is a shadow of its former self. While its oil exports still represent about 60 per cent of the total petroleum traded internationally, its member states produce only 40 per cent of the world's crude oil. So unless Russia, which is not a member, cooperates with Opec, any production cuts could still fail to lift prices.
Furthermore, Saudi Arabia, by far Opec's biggest exporter and the world's second-biggest oil producer, is worried not only about prices, but also about its ability to find customers for its crude.
The Saudis fear a repetition of the 1980s, when they agreed to a cut in production, only to see other exporters muscling into its markets; Saudi Arabia is determined to keep its share this time, especially in Asia.
And then there are broader political considerations. The Saudis are furious with Russia's support for the Syrian regime of President Bashar al-Assad, whom Riyadh views as merely a proxy for Iran. As a result, the Saudis are disinclined to help Russian President Vladimir Putin, who has asked for a cut in oil exports. Instead, the Saudis are starting to bait the Russians, by offering deliveries of oil to Eastern Europe, a region which Russia considers as its "internal" market.
However, the biggest politically motivated oil showdown is between Saudi Arabia and Iran. The Saudi authorities are determined to prevent Iran from regaining the market share it had before Western sanctions were imposed on the country, largely in order to warn Teheran that it has no hope of dominating the Middle East.
At this week's Opec meetings, Saudi Arabia suggested that Iran should get an oil production quota of under 3.6 million bpd, far less than the 4.8 million bpd which the Iranians want. The result is, therefore, a stalemate which is enduring, for although the Saudis are suffering, the country has deep reserve pockets and almost no debt, so it can continue absorbing the losses from low oil prices for much longer than Iran, its chief strategic competitor.
Eager to put a positive gloss on Opec divisions, Saudi Energy Minister Khalid Al-Falih claimed that "the gap between Opec countries is narrowing" and a deal may still be reached when the organisation meets again in November.
But few experts buy this argument. "We don't see the oil market rebalancing until late 2017," said Mr Birol of the International Energy Agency.
A version of this article appeared in the print edition of The Straits Times on September 29, 2016, with the headline 'Little chance of deal to cut oil output'. Print Edition | Subscribe
We have been experiencing some problems with subscriber log-ins and apologise for the inconvenience caused. Until we resolve the issues, subscribers need not log in to access ST Digital articles. But a log-in is still required for our PDFs.