Commentary

Non-OPEC Countries Join Deal to Cut Oil Production

Middle East In Focus

Middle East Policy Council

Views from the Region

Last month the Organization of the Petroleum Exporting Countries (OPEC) enacted an agreement to cut oil production to shore up global prices. Now, after months of negotiations and over a decade since the last such bargain, a large group of non-OPEC countries have agreed to join with OPEC to further limit production. While daily extraction will see an overall decrease, some countries, including Libya and Nigeria, will be allowed to increase their production. Many observers remain skeptical of the deal, worrying it will prove to be vulnerable to cheating, but that has not stopped the markets from responding positively to the news. Meanwhile, Iran, which also managed to negotiate an exemption from cutting production, has seen government officials, particularly from the reformist camp, tout the deal as a victory for Iranian diplomacy.

After the non-OPEC countries agreed to join the production-limiting deal, Gulf News’s Fareed Rahman suggested that “The oil market is set to move higher in the short term following the deal between OPEC and non-OPEC members on Saturday, but there are plenty of challenges that oil-producing countries will have to overcome....OPEC has a poor record when it comes to complying with its own production targets and this could be made even more difficult considering the rising production seen from Libya and Nigeria, both exempt from cutting production....According to the consultancy IHS Markit, OPEC and non-OPEC nations will be tiptoeing towards the lowered target in 2017 rather than leaping towards it.”

According to an Asharq Alawsat staff report, the agreement is significant because it comes more than a decade since the last one was struck between OPEC and non-OPEC countries, even as doubts remain about whether they will abide by it: “On Saturday, ministers of OPEC were discussing the cut of oil production to 600,000 barrels for non-OPEC countries. The meeting ended with less than expected. [The] president of [the] Organization of Petroleum Exporting Countries (OPEC), Qatar’s Energy Minister Mohammed bin Saleh al-Sada, said that non-OPEC countries agree to cut oil production by 558,000 barrels per day. If this number is less than the target, it doesn’t negate that OPEC has finally managed to convince non-OPECs to join the Vienna agreement....The 13 non-OPEC countries taking part in the agreement are: Russia, Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, South Sudan, Brazil and Bolivia.…This is the first agreement reached by OPEC and non-OPEC since 2001.

The observance of the deal is likely to be the key indicator of sustainability, although the bar has been set pretty low in the past. Gulf News reports: “Strict compliance to output cuts and cooperation from non-OPEC members will play a key role in the successful implementation of the OPEC deal that was reached between the member countries in Vienna last week....There will be question marks on how this deal will be implemented as OPEC has a poor history of compliance, and that may come back to haunt the producers once the initial euphoria and position adjustments have run their course....Libya and Nigeria [are] also expected to pose a challenge. Being exempt from the deal, both countries have the potential, stability permitting, of increasing production by more than 500,000 barrels per day over the coming months. Any increase from these two countries will naturally dilute the impact of the agreed production cuts.”

But a recent Khaleej Times editorial makes it clear that all oil-producing countries should have an incentive to follow through on the agreement: “Oil-producing countries will fare better with a deal…. It's not just a matter of who will blink first and agree to a cut in oil production. Despite the assurances and proposals in Algeria in September, the Organisation of the Petroleum Exporting [Countries] (OPEC) is yet to find a clear way to stabilize the oil market....The stance hardens when the countries get behind closed doors and debate, each unwilling to lose ground and get the maximum leverage. At least that's what we have seen in the last few years. Even though the chances of a pragmatic solution are up in the air, the markets played along with the optimistic spiel of the ministers at Vienna....As per research, petroleum extraction in the Arctic region has the highest breakeven price of $75 per barrel. On the other hand, Middle Eastern countries have the lowest price at $27 per barrel, and U.S. shale-oil producers have a breakeven price of $65 per barrel.”

With a presidential election looming, the deal may be good news for Iran’s “moderates.” The National’s Majid Rafizadeh suggests that the OPEC deal plays domestically as a big win for Iran, which did not have to cut production, while its rival Saudi Arabia did: “This agreement was forged despite significant political obstacles among several members including Iran, Saudi Arabia and Russia. Crucial compromises had to be made….The accord is also a significant political victory for Iran, particularly the moderates, when it comes to foreign policy....As the Iranian presidential election approaches, the moderates can claim this deal is a political and economic victory. The moderates can also make the case to Ali Khamenei, the supreme leader, that they stood their ground and paved the way for more revenues to pour into the Islamic republic....The politicization of oil exports is deeply rooted in Iran’s foreign policy. Tehran was cognizant of the fact that reducing its oil output could be a political victory for Riyadh....While Iran is celebrating its ‘historic’ deal, OPEC may still need to cut oil production further to adequately tackle low oil prices.”

Iranians, as shown by this op-ed in the pages of Tehran Times by Ebrahim Fallahi, have indeed been celebrating the deal: “Two months ago in Algiers an agreement was outlined based on which the OPEC and non-members were obliged to cut their productions in order to stabilize the market. The idea received waves of skepticism from the very first moments. With Iran’s tensions with its arch-rival Saudi Arabia at highest and with Russia not in accordance with the organization regarding any cuts in its production the chances of the real implementation of the [agreement] looked quite dim....Iran turned the tables on Saudi Arabia and, unlike all other OPEC members, the country managed not only to keep its current production level but also to raise it.  The Iranian oil minister believes that this success has been [the] result of a healthy diplomacy, when all members put economic interests before raising controversial political issues.”

But is this a return to the driver’s seat for OPEC, or a brief interruption on its slide to irrelevance? Hussein Shobokshi, writing for the Saudi Gazette, wonders whether, given the ongoing tensions among the various members of the organization, “OPEC [has] entered into a state of coma and clinical death? This traumatic question seems to crop up between interactions within the members of the organization as the influential group fails to decide the price of the commodity in the global market as it was the case in the past too....It is clear that the impact of ‘politics’ is far more profound than the impact of ‘economy’ within the organization. The regional conflict between Saudi Arabia and Iran has led to a complete breakdown of coordination between the member states, heading to a situation where no agreement on price control and output could be reached. The disagreement has also led to frauds and irregularities among member states, hurting the oil prices in the process....Now the fact is that we are entering ‘post-OPEC’ situation, which is similar to the ‘League of Nations’ that existed before the creation of the United Nations. It is simply to say that for each entity there is an expiry date and this is exactly what is happening with OPEC.”


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