OPEC meetings may provide economic answers — or just more questions

Times change. The opening line of a Wall Street Journal story this morning started: “Saudi Arabia is threatening to boost oil production…” But hold off the rejoicing for a moment. Riyadh’s motive is to re-instill discipline in the OPEC cartel in order to keep prices up. Its ambition is to make sure the cartel members actually reduce production.

The logic is simple. If oil supply is kept down, prices will go up. But there is a potential twist. If demand also goes down, prices could ease. In those three short sentences, that is the challenge facing OPEC members when they meet in Vienna tomorrow, and when they meet the next day with non-OPEC oil producers led by Russia.

Making a bet on the outcome of those meetings is only for fools or those with the calmest temperament and the deepest pockets. Where is the U.S. economy heading, especially in the absence of a tariff agreement with China? An additional twist is that if the price of oil increases, exploiting American shale oil reserves becomes viable. The key figure is oil around $60 per barrel. Below that, shale production is likely to fall. Anything above — and today Brent oil, a key benchmark, is around $64 — and the extra oil flows.

These sort of arguments have swirled in advance of previous OPEC meetings, but this time there is a special extra factor. Thursday marks the completion of the partial sell-off of the Saudi state oil company, Saudi Aramco. Riyadh will want to depict the IPO, as the process is known, as a resounding success. The reality is almost the opposite. Instead of 5 percent of the shares becoming tradable on the Saudi stock exchange, only 1.5 percent will be available. And the price for those shares will be significantly less than Crown Prince Mohammad bin Salman, aka MbS, had hoped for.   

Having a buoyant oil price will help appearances, albeit briefly. But the Saudi threat to play with oil production levels is a reminder that Saudi Aramco is driven by political, rather than commercial, decisions.

Friday will be more than just “the day after.” It comes with its own challenges. Notionally, Russia has been part of the deal with OPEC to cut supplies by 1.2m barrels per day until the end of March 2020. But Russian oil companies operate commercially and so have been less than scrupulous in keeping to agreed cutbacks. Whereas the Soviet Union was once almost the devil incarnate to Saudi Arabia, President Vladimir Putin’s Russia is a potential strategic partner — more consistent, although perhaps not more reliable, than President Trump’s America. 

If further agreement on production limits is achievable, it likely will take us through the end of September — in other words, almost to Election Day in the U.S. In the interim, will that mean a stable economy or a growing economy? Economists like to remind us of what they call “extraneous factors.” By definition, their impact is hard to predict — for example, U.S. impeachment proceedings, or Brexit implications for Britain and Europe.  Looking back in 2019, we are still trying to work out the implications of the Iranian missile attacks on the Saudi oil processing facility at Abqaiq.

The events in Vienna over the next two days may offer some clarity, or they may simply provide more ambiguity.

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.