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Is Opec falling apart?

The Organisation of Petroleum Exporting Countries is a cartel of 12 oil producing countries and has been in operation for the past fifty years. Yesterday its members met in Vienna, ostensibly to agree to raise production levels in order to put supply more in line with current demand levels, and so lower prices.

The failure of Opec to agree production increases may result in higher prices at the pumps.

However, there appears to have been something of a bust-up at the meeting. According to the Saudi oil minister Ali al-Naimi, “This is one of the worst meetings we have ever had.” The reason for his concern was that Saudi Arabia wanted to increase production to take some of the pressure off the major oil-consuming countries, but was blocked by a group of countries including Venezuela, Iran, Algeria and Libya.

The background to this is that according to BP, oil consumption rose by 3.1% last year, which was more than twice the 10-year average increase. China was mainly responsible for this surge in demand with an increased consumption of over 10% last year. With countries continuing to increase economic growth rates following the recession, additional pressure has been put on prices from the demand side.

In fact prices this year have already risen by 20% and the failure to reach agreement to raise production by Opec, led to the price of Brent crude rising by $1.65 dollars a barrel to $118.43.

The disagreement within Opec is partly due to political differences, but also the fact that some nations are genuinely concerned for the welfare of their own population. Some countries argued that they needed to keep oil revenues high so that they can support their citizens who are facing mounting increases in price of food and other commodities.

Will Opec disintegrate? These current differences are probably not enough to undermine the cartel, but it has to be borne in mind that production levels can rise above the quota levels anyway if a country like Saudi Arabia decides to produce more. Also, Opec is not as powerful as it once was. At the end of last year the organisation’s members only controlled 44% of total world production of oil, although they do hold 79% of proven crude oil reserves. Other oil producers may now increase their output to take advantage of the higher prices.

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Posted in Energy supply and security, Oil, OPEC

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