A New Attempt to Raise Oil Prices

In the fifteenth meeting of the International Energy Forum (IEF), which will be held from September 26 to 28 (October 5 to 7) in Algiers, seventy-two countries producing and consuming fossil fuels will participate. However, what will put the Algerian capital under the scrutiny of economic observers in the coming days is not this gathering, but an informal meeting that will take place on the sidelines. This informal meeting is set to bring together OPEC member countries and several non-OPEC producers in the same city on October 5. The aim of the informal meeting of oil producers in Algiers, continuing the unsuccessful efforts that have been ongoing for about a year, is to raise oil prices. The price of this commodity, which surpassed $100 per barrel in mid-2014, has fluctuated between $45 and $50 in recent days. Considering the drop in oil prices over the past two years, the average loss for OPEC member countries exceeds $700 million per day. Saudi Arabia, as the largest OPEC member producer, has incurred an average daily loss of $225 million during this period. Iran's average loss has also reached nearly $50 million per day. It is also essential to emphasize that China, the most significant factor in the raw materials market boom, including oil, over the past two decades, is undergoing a major structural transformation that is shifting its industries from a primitive state to complexity. For OPEC member countries, which have no other source of foreign currency besides oil exports, the continuation of the current situation is a real disaster. Several non-OPEC oil-producing countries, especially Russia, are also in a fragile economic situation. OPEC has significantly lost its ability to influence the global oil market due to various reasons, including internal rifts, and needs cooperation from non-member producers. What has caused the price of 'black gold' to drop from above $100 to below $50 per barrel over the past two years is the existence of oil in excess of demand in the market. Oil is abundant in the market, partly because the United States, relying on unconventional oil (shale), has become one of the top three producers of this commodity in the world (alongside Russia and Saudi Arabia), Riyadh and Moscow are producing at maximum capacity, Iraq is becoming a major oil giant, and Iran has brought its production back to levels close to pre-sanction times. Additionally, the global economy is experiencing a slowdown in growth and has little need for extra oil. It is also crucial to note that China, the most significant factor in the raw materials market boom, including oil, over the past two decades, is undergoing a major structural transformation that is shifting its industries from a primitive state to complexity. One of the consequences of this transformation is increased productivity, greater adherence to environmental requirements, and a move towards renewable energy. In other words, China's thirst for increasing fossil fuel consumption, especially oil, is subsiding, an event that naturally significantly lowers oil demand. Given all these developments, and to counter the oil market recession, OPEC must reduce its production, which currently fluctuates around 33 million barrels per day, or at least prevent it from increasing. However, Saudi Arabia, which holds the leadership of OPEC, knows well that it cannot effectively influence oil supply without the participation of non-member producers, primarily Russia. For about a year, joint efforts between Moscow and Riyadh to reach an agreement on controlling oil supply have begun. The first step in this regard, from the perspective of both oil powers, is a 'freeze' (keeping production steady) to prevent an increase in oil supply along with the risk of further price drops. In April, representatives from several OPEC member and non-member countries gathered in Doha to reach an agreement on a 'freeze' in production. This effort failed due to disagreements between Iran and Saudi Arabia. Tehran supported any initiative, including a 'freeze', aimed at raising oil prices but recognized its right to increase production until it reaches pre-sanction levels, and thus refused to accept any restrictions. Riyadh used Tehran's stance as an excuse and was unwilling to accept an agreement on the 'freeze'. Will the informal OPEC and non-OPEC meeting in Algiers have a better chance of success than the April meeting? According to several Western media reports, representatives from Tehran and Riyadh met several times last week at the OPEC headquarters in Vienna to pave the way for an agreement. Based on unconfirmed reports, Saudi Arabia is willing to accept Iran's 'freeze' of production at its current level (3.65 million barrels per day), while other producing countries would freeze their production at the lowest level of the past nine months. It seems that Iran has rejected this proposal. In this situation, what will be the outcome of the oil meeting on October 5 between OPEC and non-OPEC countries? In response to this question, three scenarios can be considered: 1) Optimistic scenario: All countries, including Iran, will agree to a 'freeze' in production at current levels or even lower to prevent unproductive competition among producers and restore relative prosperity to the global oil market. 2) Intermediate scenario: A significant number of producers, especially Saudi Arabia and Russia, will agree to freeze their production at current levels or the lowest level in the past nine months, but simultaneously allow a few countries, particularly Iran, to increase their production to a certain level. Libya and Nigeria, which have faced severe production declines due to civil war, will also be allowed to remain outside the 'freeze' until they return to their previous production levels. 3) Failure scenario: Given the existing disagreements among producers, especially between Iran and Saudi Arabia, the Algiers meeting will meet the same fate as the Doha meeting, and oil prices, even if they do not fall, will not be able to rise above $50 per barrel. Currently, the failure scenario seems much more likely than the other two scenarios. Among the twenty-three oil analysts consulted by Bloomberg news agency, only two analysts considered reaching an agreement at the Algiers oil meeting feasible. It is evident that even if the participants in the Algiers oil meeting reach an agreement, its implementation will be very challenging, and its impact on the global oil market does not seem certain. Beyond such agreements, three very important variables weigh on the future of the global oil market in the short and medium term: 1) Tehran is determined to increase its oil production to five million barrels per day within the next three to four years. This decision is feasible, provided that the model of new oil contracts prepared by the Iranian Ministry of Oil is finalized and irrevocably established in Iran's relations with international companies, and with the provision of other necessary conditions, foreign investments in Iran's oil fields significantly increase. If these two conditions are met, there is no reason for Iran to submit to a 'freeze' in production, especially in line with Riyadh's goals. Conversely, without foreign investment and technology, it seems unlikely that Iran can exceed a production level of four million barrels per day. 2) Iraq, despite all its internal difficulties, is rapidly rising in the oil scene and is currently producing four million three hundred thousand barrels per day, becoming one of the six largest oil producers in the world (after Saudi Arabia, Russia, the US, and on par with China and Canada). Even if the Iraqis agree to the 'freeze', they will not adhere to it very strictly, as they will be able to reach five million barrels per day in a short time, and even producing six to seven million barrels within the next three to four years is not out of reach for them. Saudi Arabia will not be able to block Iraq with a 'freeze'. 3) The variable that weighs most heavily on the developments in the global oil market is the production of unconventional oil (shale) in the US. Many producers of this type of oil in the US were forced to halt their operations after the price of 'black gold' collapsed (with oil below $45 per barrel, shale production is not profitable). Now, suppose that Riyadh and Moscow, through their initiatives, including at the Algiers meeting, manage to raise the price of this commodity. If this happens, shale oil production in the US will once again become profitable, and with its increased supply, oil inventories in the market will rise again. In other words, the success of the Algiers meeting, by reviving the global oil market and facilitating the increase of shale oil production, could lead to results contrary to what is expected and further increase the excess oil capacity in the market. We see that oil exporters are facing new challenges.