Iran's Defiance of Imposed Quotas Marks the End of OPEC?

The failure of the informal meeting of OPEC member countries and six non-member oil producers on Saturday, October 29, in Vienna, aimed at finding a framework for crude oil supply reduction, due to Iran's inflexibility regarding the rejection of 'imposed production quotas', is another nail in the coffin of the Organization of the Petroleum Exporting Countries. The changing nature of global oil markets, effective competition from non-OPEC producers, especially Russia, increased crude oil production in the United States, and the U.S. move towards complete independence from imported oil from the Middle East, along with Saudi Arabia's decision to end its role as a 'swing producer' in OPEC and price stabilizer, are other factors that have made the continued existence of the oil exporters' organization in its traditional form increasingly difficult. Bilateral contacts between Russia and Saudi Arabia, two of the world's largest crude oil exporters (one within OPEC and the other outside it), have recently raised hopes for a reduction in oil supply to the market, and correspondingly, oil prices have somewhat stabilized. Despite the relative importance of a potential agreement between Russia and Saudi Arabia to limit crude oil supply to the market, a definitive and more significant decision must be made by the 14 OPEC member countries, which hold 81% of the world's crude oil reserves (compared to 19% from non-OPEC countries) and still control 60% of total annual oil trade. The meetings of OPEC ministers in Vienna in April of this year and other meetings in June and August aimed at coordinating the oil production quotas of member countries were fruitless due to the discord and resistance from Iran, Iraq, and recently Libya, Algeria, and Nigeria with other members (mainly Saudi Arabia), leading to a decline in oil prices after experiencing a few months of relative improvement. OPEC countries produce 33 million barrels of crude oil annually, and Iran's current oil production share is still about one million barrels less than before the imposition of unilateral sanctions in January 2012. After the lifting of nuclear sanctions last year, Iran insists that if OPEC's oil production is stabilized, it should be exempt from imposed production quotas and allowed to bring its production back to pre-sanction levels—an action that would practically mean over one million barrels of oil entering the market. For politically obvious reasons, Russia has supported Iran's expectation and insistence on unrestricted oil production, but Saudi Arabia opposes it. Iran, in the months following the lifting of sanctions, has increased its oil production capacity by 500,000 barrels per day with limited costs and relative speed, maintaining part of its production capacity from before the sanctions. Increasing oil production by another 500,000 barrels, in addition to the production ceiling of 3.5 million barrels per day, and reaching the government's announced target of 4 million barrels for the current Christian year, requires significant investment in the upstream oil sector (exploration and exploitation). To increase the production capacity of the Islamic Republic, it needs to be exempted from the OPEC-determined oil production quota. Saudi Arabia and OPEC, aware of Tehran's financial constraints, have shown some success with this request on the condition that Iran's oil production increases to 4 million barrels per day by the beginning of December this year. Considering technical, time, and capital constraints, Iran is likely to fall short of its announced goal for increasing oil production capacity within the specified time. For this reason, Tehran has demanded an unlimited exemption from OPEC's production quota and insists on this demand. In adopting a logical and justified policy, Iran seeks to regain lost oil sales markets and stabilize its share in global markets while also aiming to increase crude oil production capacity. Iraq has also requested exemption from OPEC's oil production quota under the pretext of being engaged in the war against terrorism (ISIS), while it has enjoyed this privilege in the years following the end of the U.S. military occupation and today is considered the second-largest producer and exporter of OPEC after Iran. In addition to Iraq, Libya has made a similar request under the pretext of fighting terrorism, while Algeria and Nigeria have sought exemption from OPEC's production quota with different arguments. The implication of Iran, Iraq, Algeria, Nigeria, and Libya benefiting from this privilege would be an increase of over 2 million barrels of oil production in addition to OPEC's July production of 33.5 million barrels, injecting this amount of oil into the market. OPEC, which has struggled to reach consensus without challenges regarding the appointment of senior managers (president and secretary-general) in recent years, is now grappling with an even larger problem in reaching consensus on production quotas. Concurrently with the fruitless meeting on Saturday, representatives of oil-producing countries in Vienna witnessed another event that made headlines globally and reduced stock values in global markets. Oil prices also fell below $50 per barrel on the same day after several months of a gentle upward slope. The factor behind the decline in stock values in the market was the announcement by the Federal Bureau of Investigation (FBI) to reopen the controversial email case of Mrs. Clinton, the Democratic Party's presidential candidate in the U.S. elections! Some observers attributed the drop in oil prices to the unsuccessful Vienna meeting, which took place on the day the FBI announced its decision to reopen Mrs. Clinton's case, while others pointed to the FBI's decision. Another reason for the decline in oil prices was the drop in stock prices in the markets, which usually moves in tandem with stock prices up or down. The recent weakening of oil prices in the market also had two other non-immediate causes that were not mentioned in the competition on Saturday between the impact of Mrs. Clinton's declining presidential prospects on one hand and the expectation of increased OPEC oil production on the other: the announcement of a 5.7 million barrel increase in U.S. strategic oil reserves and the strengthening of the dollar, which began its upward trend after Britain's announcement of leaving the European Union and the weakening of the pound sterling's exchange rate. Contrary to the alignment of stock values, the increase in the U.S. dollar rate usually corresponds with a decrease in oil prices in the market—although due to the limited fluctuation of currency value, the fluctuation in oil prices related to it is not comparable to the price drop caused by increased supply or decreased demand for crude oil in the market. The fluctuation of oil prices in the market is largely influenced by pre-purchases, psychological effects stemming from fear or reassurance in the market. Nevertheless, increased oil supply or decreased demand has a greater impact on oil prices than any other factor. The Organization of the Petroleum Exporting Countries (OPEC), whose main purpose was to support the interests of oil exporters and set prices in the market, has long lost its conventional control over oil price fluctuations. Saudi Arabia, as the world's largest oil exporter, currently has the potential capacity to increase production by 2 million barrels per day. As a result of competition with Russia in the market and the decline in oil prices over the past two years, Saudi Arabia has suffered hundreds of billions of dollars in losses, and this year its budget faces a $100 billion deficit. In addition to changes in the global order over the past 20 years, one of the results of which has been Russia's entry into the free oil export markets and competition with OPEC, the end of Saudi Arabia's role as a swing producer in OPEC and Iran's insistence on increasing crude oil production capacity have turned OPEC into the fifth wheel of the oil market, casting serious doubts on the necessity of its continued operation in its current form.