As OPEC Meeting Looms, Geopolitics Is Brought To The Forefront

Oil and politics are a volatile combination. At OPEC's meeting this coming Wednesday, the two are once again on a collision course. Each member will bring its unique geopolitical baggage to the table. Deal or no deal, what happens on Wednesday will Impact The Future of Oil & Gas.

Since the oil embargo of the 1970s, OPEC has kept politics at a healthy distance, focusing instead on maximizing returns in the market. OPEC still steers clear of geopolitics as best it can, but members are finding it harder and harder to stop domestic politics from creeping into their agenda. Bisnow spoke with Jim Krane, Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy, about the buildup to Wednesday’s meeting. 

First and foremost, Jim says it’s important to remember that OPEC’s ability to move the market is more constrained these days. OPEC is still an important player, but the rise of non-OPEC producers and other large oil reserves has limited its impact, so regardless of the decision, its effect won’t be as massive as some think. Jim says it's also important to understand that economies are no longer as reliant on oil as they once were, so OPEC doesn't have the type of geopolitical power it once had. 

Jim thinks OPEC is boxed in. If it decides not to cut production, the price will only drop a bit. If OPEC does agree to a significant cut (anything over 500,000 barrels a day), the price will kick up $5 to $10, which will bring more oil onto the market and move rigs back out, bringing the price back down, putting OPEC back where it started—competing for market share against shale and light oil exporters. 

Jim sees oil prices stuck in a band with a floor and ceiling that are coming together—at least for now. Unless there's a radical change in demand or supply, price volatility is constrained. But anything over $50 will keep rigs moving, putting some downward pressure on prices.

The election of Donald Trump has raised many questions in the Middle East. Jim says Trump’s goals to look at the Iran deal and reset relations with Russia could conflict, as Russia is a signatory of Iran and partner in other conflicts, like Syria. Taking a hard line on Iran could hurt further relations with Russia and other states in the region. 

Then there’s Trump’s talk about Saudi Arabia. The US spends $50B to $100B a year to station troops and provide a security umbrella for the region. The expenditures go back to the Carter Doctrine, which stated the United States would use military force to defend national interests in the Persian Gulf. President-elect Trump has called into question the United States’ return on that investment. If the US backs away from the doctrine, Jim says Saudi Arabia would take an even more independent foreign policy position in the Middle East that America may not like. 

As the key player in OPEC, the Saudis have their own issues to deal with. Jim tells us the Saudis have had a new stance since 2014. They’re trying to hold on to market share in a time of oversupply. Conventional wisdom is that peak oil demand will happen sooner rather than later, and when it does, a new era of strategy will reverberate through the industry. Producers will look to different ways to ensure market share, like moving into industrial uses and petrochemicals. Saudi Aramco has recently been acquiring and constructing refineries to create a captive market for its crude. 

On top of all the market pressures, politics is playing a key role. OPEC countries want the highest price because their domestic government budgets depend on it. Many members are in increasingly deep debt due to low prices. While some have strategies to deal with the cyclicality of the market, others, like Venezuela, are in crisis. 

The myriad questions and baggage coming into Wednesday’s meeting in Vienna have only been amplified by diplomatic drama. Saudi Arabia pulled out of a meeting with non-OPEC nations that was supposed to take place today, citing the need to focus on dealing within OPEC instead. Iraq and Iran, OPEC’s second- and third-largest producers, have yet to agree on a detailed plan to reduce output. The most recent Saudi-backed proposal would set a production ceiling of 32.5 million barrels a day. 

On Wednesday, all eyes, especially those in Houston, will be fixed on Vienna. Experts say due to all the competing goals, a deal seems unlikely, but 2016 has taught us that anything can happen. Hear more from Jim and a who’s who of experts at Bisnow’s first-ever all-day National Impact Of Oil & Gas on CRE event Dec. 15.