By Andrew Critchlow
Oil price war expecting to drag into 2016 and beyond. Photo: Alamy
Almost a year ago Rafael Ramirez, Venezuela’s long-serving former oil minister, emerged from a tense meeting of the Organisation of the Petroleum Exporting Countries (Opec) looking red faced and furious.
Within the privacy of Opec’s steel-clad secretariat building in Vienna’s quiet Helferstorferstrasse, Ramirez had remonstrated angrily with his counterpart from Saudi Arabia, Ali al-Naimi, about the urgent need for the group of major oil producers to push up the price of crude back to a level around $100 per barrel.
The two men couldn’t be more different in appearance or world view. The diminutive Al-Naimi is a rarity in Saudi Arabia, having risen to arguably the country’s most important job from humble origins as a Bedouin shepherd boy.
However, Al-Naimi stands as a titan in the global oil industry and wields the real power within Opec, a group that controls 60pc of the world’s oil.
Standing well over six feet tall, Ramirez towers over his Saudi counterpart but that is where his advantage ends. Although it sits on vast oil reserves estimated to exceed 290bn barrels, Venezuela has been marginalised within the group of 12 oil producers. Although still close to the country’s oil sector, Ramirez – who was close to the country’s late Marxist leader Hugo Chavez – is no longer officially part of its Opec delegation.
In contrast, Al-Naimi is the main architect for Opec’s current policy of allowing oil prices to weaken naturally to win back market share from US shale oil producers and its other major rival Russia.
With the support of a close network of Arab Gulf allies in Qatar, the United Arab Emirates and Kuwait, Al-Naimi convinced Opec last November that it could no longer afford to surrender market share to its rivals by cutting its own production to defend higher prices.
So far the strategy has held together even though it has failed to significantly reduce oil production outside Opec member countries. However, that uneasy consensus within Opec will be put under severe test when the group meets for its final gathering of the year in December.
Heading into the meeting in Vienna, Ramirez, who is now Venezuela’s ambassador to the United Nations, has already signalled his country’s intention to press for a change in policy. Lower oil prices have crippled Venezuela’s economy, where a 22pc spike in food price inflation in August has meant the country is even struggling to feed itself.
Photo: Meridith Kohut
In a recent interview with Reuters, Ramirez said he wants Opec to cut production by introducing a series of price bands starting at $70 per barrel. The proposals he said would be formally presented for discussion at a meeting of “technical experts” which Opec is convening on October 21. This has potentially put Venezuela and its close allies within Opec, including Algeria, Nigeria and Iran, on a collision course with Al-Naimi and his Gulf Arab clique who still appear determined to maintain their current strategy.
According to Opec’s former president, Abdullah bin Hamad al-Attiyah, a change in policy is unlikely without any cuts in production being matched by countries outside the group such as Russia and Mexico.
“Opec has no choice because they no longer have the tools to be a global “swing producer” anymore,” Al-Attiyah said. The former Qatari energy minister points to Opec’s falling share of the world market, down to just over 30pc from almost 60pc 20 years ago.
Saudi Arabia’s power within Opec comes from its vast oil reserves and production, which it has increased significantly since last November. It pumps around 10.5m barrels per day (bpd) of crude and has the capacity to increase output by 12.5m bpd if it so chooses, which gives it tremendous power alone to influence world oil markets.
“Even Saudi Arabia cannot play as the ‘swing producer’ anymore as they used to and we cannot always ask Saudi Arabia to make the sacrifice, and they won’t, because they will lose more of their market share,” said Al-Attiyah.
However, Al-Naimi’s hand in the forthcoming Opec meeting has been significantly weakened by the political turmoil now engulfing the kingdom. The succession of King Salman bin Abdulaziz al-Saud has arguably seen Al-Naimi lose influence within the corridors of power in Riyadh. The kingdom’s current strategy at Opec was endorsed by the country’s previous ruler, the late King Abdullah, who was a key supporter of Al-Naimi.
On taking power, King Salman elevated his son Prince Abdulaziz bin Salman to the role of deputy oil minister and replaced Al-Naimi as chairman of Saudi Aramco, the state-owned, oil-producing monopoly.
The oil price war, which Al-Naimi effectively started, has also put the kingdom’s finances under severe strain at a time when it is fighting a full scale war in Yemen and funding moderate opposition groups fighting Bashar Assad’s regime in Syria.
King Salman’s government is now being openly criticised internally after 1,400 pilgrims were killed in a stampede outside Mecca last month, and the weak oil price is only adding to the political pressure that is building in Riyadh.
The presence of Russia’s military in Syria essentially supporting the Assad regime will test Al-Naimi’s nerve even further. Russia is the world’s biggest oil producer just ahead of Saudi Arabia and neither side is willing to surrender market share to the other. The sight of Russian jets bombing Islamic State targets in Syria adds a worrying new dimension for Riyadh to consider when formulating its oil strategy.
To complicate December’s meeting even further, there is the issue of how to allow for increased production from Iran and the return of Indonesia as a member country.
The historic deal reached this summer to rein in Tehran’s nuclear programme has brought the lifting of economic sanctions tantalisingly close for the Islamic republic.
Freed from the shackles of embargoes, Iran’s oil ministry predicts the country could increase exports by around 1m bpd by the middle of next year.
Sanctions had reduced Iran’s influence in Opec but this will change in December with the country’s experienced oil minister, Bijan Zanganeh, likely to challenge Al-Naimi’s authority within the cartel. Relations between Saudi Arabia and Iran are now at boiling point due to Tehran’s support of rebels in Yemen and the Assad regime in Syria.
Oil is arguably Saudi Arabia’s best weapon against both Russia and Iran. Although the kingdom’s finances are under severe strain from the collapse in export revenues it can still fall back on its $655bn (£423bn) of foreign assets while Russia and Iran will feel the impact of another year of weak oil prices more acutely.
After a year of carnage in the oil industry, it is now clear that it will take more time for Al-Naimi’s strategy of allowing weaker prices to do the job of totally shutting down higher cost producers.
A 60pc slump in oil prices since last November has caused havoc but the main target of Opec ‘s campaign, shale oil in the US, has so far proved to be remarkably resilient.
Hardest hit have been the high cost producers in areas such as the North Sea where prices below $50 per barrel have placed the entire offshore industry at risk.
Energy consultant Wood Mackenzie now fears that 140 fields in the waters off north-east Scotland, where oil has been pumped since the 1970s, could be closed down over the next five years if oil prices remain so low.