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By Robert Rapier on Nov 26, 2007 with no responses

The OPEC Showdown

It has been clear for some time that OPEC members are deeply split over whether $100 oil is good for them in the long-term. Saudi Arabia, having been in this game a long time, probably understands better than most the effect that high oil prices will have. While short-term gains will be great, ultimately economies will falter and demand for their product will be destroyed. Iran and Venezuela, on the other hand, probably couldn’t care less whether the U.S. economy chokes on these prices. The Financial Times covers the impending showdown:

Opec rivals in sequel to oil production drama

The Opec summit show is over and the performers have left town. But the preparations for Act Two, the meeting of oil ministers in Abu Dhabi on December 5, are already under way.

The scene is being set for a contest over whether to accept an oil price close to $100 a barrel or try to bring it down by raising production, with Iran and Venezuela on one side and Saudi Arabia on the other. The ministers’ decision will be an important signal of whether the influence of Saudi Arabia, traditionally the group’s most powerful member, is on the wane.

I think that Saudi will win this round and get a compromise production increase, but this disagreement will continue to fester.

“They [Saudi Arabia] have been trying to soothe the market’s worries for two reasons: because they think that the high oil price will hurt the economies of consuming countries, and more importantly, because they think it will hurt demand for oil in the medium to long term,” she said.

Iran and Venezuela have no such concerns. Their priority is to maximise short-term revenues. Their industries probably lack the capacity to pump any more oil, so they would not benefit from any increase in Opec’s production limits. Unlike Saudi Arabia, they take little interest in safeguarding the health of the US economy.

Saudi Arabia demonstrated at the previous Opec meeting, in September, that it could still get its way in spite of strong opposition from other members.

Ali Naimi, the Saudi oil minister, convinced the rest of Opec to agree an output increase of 500,000 barrels a day, as a contribution to the world’s economic stability.

But resistance from even Saudi Arabia’s traditional allies, such as Qatar, highlighted its growing difficulties in managing Opec.

And if Saudi does want a production increase, they may end up shouldering the bulk of the increase:

There are signs that Saudi Arabia has been going it alone in increasing production; analysts estimate that it has accounted for the lion’s share of the Opec production increase agreed in September, and perhaps even more.

Mr Naimi said recently that Saudi Arabia’s output was now 9m barrels per day. Edward Morse, chief energy economist of Lehman Brothers, says that is about 600,000 b/d more than estimates of Saudi production over the summer.

If they don’t (or can’t) start to bump up production faster than they are currently doing so, by next summer we may think $100 oil is cheap.