OPEC's Ministerial Council has reached a compromise agreement of a diplomatic nature, by virtue of which the organization has managed to avoid the political disputes raging among the countries of the region, especially Saudi Arabia and Iran, as was the case in the ministerial meeting that took place back in June. It is clear that diplomacy has dominated the essence of the agreement, rather than confirming oil-related details that the markets usually like to hear, and as the habit had been with the agreements reached within the organization in the past. But perhaps the vague diplomatic solution was the best possible option given the present situation, in order to secure consensus by all Member States following the sharp disputes seen in the last ministerial meeting – in which the council failed to reach any decision, save for public admissions by some officials of failure to reach a compromise solution. The ambiguity of the current agreement lies in the fact that a production ceiling of 30 million barrels per day was adopted for the organization's Member States, without specifying the quota for each respective country, as is otherwise customary. In addition, the 30 million barrel ceiling includes Libya's output “both at present and in the future” (Libya currently produces around one million barrels per day, and plans to produce 1.6 million barrels per day by next June.) The agreement also includes the Iraqi production, which is projected to rise by about 0.6 million barrels per day, in 2012 of course. Since OPEC's agreement is over output ceiling, this means that the overall production of Member States must not exceed this level, regardless of the capacities of both Libya and Iraq in increasing their output, or a sustained Iranian output at its present levels despite the European boycott. However, the most important element in the agreement is that the 30 million barrel per day level indeed represents the actual output of OPEC Member States at present. In other words, demand for OPEC oil is indeed at this level, not 24.8 million barrels per day as was agreed upon in Oran in the aftermath of the collapse of Lehman Brothers in 2008. Further, Saudi Arabia has reiterated again its commitment to providing supplies in accordance with market needs, i.e. meeting global demand. However, OPEC did not explicitly state what it intends to do should demand decline, i.e. whether it would decrease output, and if so, who would do so, and what would the decrease rate be for each Member State. Since forecasts indicate that there will be a Europe-wide recession in 2012, along with an ongoing economic crisis in the United States, the markets have expressed concern regarding this deliberate ambiguity in OPEC's policy, and oil prices have fallen as an initial reaction to this. The agreement in Vienna, very clearly, represents one obvious truth, which is the weight and power Saudi Arabia wields in OPEC and the global oil arena, be it represented by the global output level, or more importantly, the spare productive capacity available to these countries, especially Saudi Arabia. Both Iran and Venezuela had tried to ignore these facts in the previous ministerial meeting, and as a result, the meeting failed. Moreover, Riyadh could have pressed ahead with the policy it pursued after the June meeting. However, Saudi Arabia is aware – as are other Member States – of the importance of reaching consensus in OPEC in the long term. In contrast to what used to happen during disputes among the Member States of OPEC, the output of GCC countries continued to meet global demand without dumping. The best proof of this was the fact that price levels remained above the 100 dollar per barrel mark – while Iranian exports stood at 2.5 million barrels per day, with an annual return of 100 billion dollars for Iran. This means that the dispute was not aimed at breaking prices, but was rather over the interests of major oil-producing counties in the balance of supply and demand, either continuously or in accordance with demand variance – in a manner that would not be influenced by chronic political spats between exporting and consuming nations. No doubt, the Vienna resolution was preceded by many consultations between Riyadh and Tehran, and it is also clear that the OPEC Secretary-General Abdullah al-Badri played an important role in reaching this compromise. The best evidence of the success of these negotiations is the Vienna agreement, and also the statement by the Iranian oil minister Rustam Ghasemi, who told reporters shortly after the agreement was reached, that the resolution “reflects intimate and cordial relations with Saudi Arabia”. OPEC usually resorts to ‘general' and ‘vague' agreements when it fails to reach detailed agreements unanimously reached by the Member States. The markets know this, as they follow these matters closely, and then attempt to reduce prices because of their lack of confidence in this kind of agreements that do not impose specific quotas on the Member States. And indeed, prices fell shortly after the meeting ended. Nevertheless, we believe that OPEC's decision, despite its vagueness, is also accompanied by a political-petroleum agreement among the major producing countries, and that it was the result of negotiations among the countries in question, over major issues. In addition, we must not forget that the Middle East is witnessing a number of political developments that may have their toll on oil supplies: The Arab Spring, the European boycott of Iranian (and Syrian) oil, the UN reports on the Iranian nuclear program, and the withdrawal of U.S. troops from Iraq, to name but a few. It is expected that these developments, whether individually or together, will lead to disruptions in supplies, increased speculation, and subsequently, the possibility of prices remaining at their high levels. *. Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
