OPEC Conflict

By Micah Halpern

I've Been Thinking:

OPEC will meet on Friday. Expect fireworks. The conflict will be between Saudi Arabia and Iran.

Many issues are at stake. The most important issue is, who sets the tone and who is leader. It is all about power.

OPEC is responsible for 1/3 of the world's oil and they have tried to control the price of oil by controlling the supply of oil. Saudi Arabia is the largest oil producer by far pumping 10 million barrels per day.

Iran is trying to re-emerge as an oil producing power and they are producing 1 million barrels per day.

But oil dropped below $40 a barrel this week and OPEC is considering limiting production. That can be dangerous.

Iran wants to limit oil in the market to drive up prices. If only it was as simple as that ubiquitous supply and demand graph in Econ 101.

In 1985 and 1986, Saudi Arabia played with supply and dropped their output from 10 million barrels per day to 2.5 million. That decision caused a drop in revenue that resulted in a 16 year cash crisis for Saudi Arabia and turned the oil market volatile.

Now, 30 years later, Saudi Arabia is thinking of suggesting a reduction of production - but that is also what Iran wants and given the tumultuous state of affairs and the conflicts between these two nations, that would be a gift that the Saudis probably don't want to give Iran.

In 2011 the Saudis walked out of the meeting because they wanted to increase production. Today the Saudis are locked in conflict in Yemen. They are locked in conflict in Syria. They are locked in conflict in Bahrain. This may be one of the most contentious OPEC meetings in their 168 meeting history.

Over the course of the past few meetings the Saudis have convinced the members of OPEC that playing with supply, despite falling prices, will hurt everyone and by keeping production stable they can predict the market.

Of course, the side benefit of keeping supply stable is that Iran cannot increase either its power ot its coffers. And that is a real benefit to the Saudis.

Micah@MicahHalpern.com 

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