Drop in oil price threatens Opec party

Agreeing on oil policy among the world's petroleum powers has often been fraught with conflict. In 1990, the issue even sparked war between two members of Opec - Iraq and Kuwait. One reason cited by Saddam Hussein for his invasion was that Kuwait's increased exports made it impossible for him to pay debts accumulated during his earlier war with Iran, another member of the exporters' club. Ordinarily, Opec's energy ministers manage to keep their jackets on inside the conference room at the group's headquarters on the banks of the Danube in Vienna, the Austrian capital.

In fact, in the past decade, as prices have risen, these policy meetings have become positively relaxed affairs. Some have even taken on a festive air. In Doha a couple of years back, the affable energy minister Abdullah al Attiyah even took ministers and journalists to share a day's fishing off a boat in the Gulf. For a decade, Opec has enjoyed the twin benefits of growing global oil demand and rising prices. It has even attracted new members, with Ecuador and Angola both joining the fold in the past year. Annual revenue has grown 10-fold in a decade to US$1,000 trillion (Dh3,670tn).

But there is nothing like a 30 per cent price drop, as we have seen in the past two months, to spoil the party. When prices and demand are falling, the twin benefits become a double whammy of fewer barrels and a lower price for every barrel. Revenue spirals downwards. At their meeting today, ministers will be presented with data showing demand for their oil is expected to fall by almost a million barrels per day (bpd) next year, requiring Opec to cut even more than that if a recent build in global inventories is to be nipped in the bud.

Certainly, the outlook for the global economy has not been this bad for decades. Just as Opec chased the economic boom higher with increasing supply, it could now end up playing catch-up as demand shrinks. What was a relaxed and friendly gathering could suddenly turn into a pretty rough game of poker. Every $1 drop in the New York futures market equates to about $10 billion in annual income for the 13-member group.

And there are plenty of issues to disagree about. The biggest ones are how to distribute any cuts in production, and what level of prices Opec should defend. Opec often refers to agreed production targets for its members, but there is no consensus over what these are. Iraq has no quota at all, while Venezuela disputes the figure assigned to it. Nobody worries about such discrepancies when prices are rising, but on the downturn, they become central to Opec's goal of achieving a credible policy, which underpins confidence in the oil market.

In the run-up to today's meeting, Iran has recommended that only those pumping above their agreed targets should cut back. This amounts to a call on Saudi Arabia to remove at least 500,000 bpd of extra output that it added this summer when prices hit a record at $147 a barrel. But the Saudi oil minister, Ali al Naimi, may not want to establish a precedent whereby it shoulders the whole burden for balancing markets as the global economy slows.

Under intense pressure from Washington and other world powers, the kingdom has committed to investing $129bn in new energy infrastructure in the next five years, and aims to maintain a capacity of 12.5 million bpd by the end of next year, representing a cushion of three million bpd above current output levels. Reducing supply means mothballing costly new field developments. Mr Naimi might justifiably feel that a unilateral Saudi cut would disproportionately reward countries that have failed to make such investments.

He will undoubtedly see the need for some moderation in oil supply in the next 12 months. But if history is any lesson, he will expect other members to share in the pain of adjusting to a slower world economy. Those who have failed to invest in new capacity will not get a free ride. Moreover, unlike Iran, Venezuela and some others, Saudi Arabia can easily cope with prices well below $100 a barrel, and could even see their interest served by it. Saudi Arabia has almost a century of crude reserves under the ground and modest budget needs, as does the UAE. So these countries are more aware of their interest in the long-term competitiveness of oil amid emerging threats from carbon taxes and alternatives such as nuclear and renewables.

Opec's internal divisions are not insuperable, and certainly should never be a pretext for war. But some members will be forced to face the consequences of their investment decisions as a decade-long oil boom appears to be coming to a close. [e-mail]