An Iranian professor said Tuesday that the Organization of Petroleum Exporting Countries (OPEC) is doomed, because of power struggles between Iran and Saudi Arabia that have created serious political fallout.
“OPEC’s power is not waning — I’m sorry, OPEC is finished,” Hossein Askari, an Iranian professor of business at George Washington University who studies the oil industry, told USA Today. “OPEC is just powerless. They cannot agree to anything, both for political reasons and economic realities.”
Saudi Arabia has kept oil prices low to hurt Iran, causing prices to remain low since mid-2014. Iran hasn’t produced much oil recently after seriously investing in its oil sector for years due to sanctions. Simply restoring previous oil production levels is estimated to require a minimum $150 billion of new investment and could cost Iran up to $500 billion over the next five years, according to reports by the country’s state-run news agency. Iran desperately needs the kind of quick cash that only selling oil on the global market can provide.
Since Saudi Arabia refused to slash production at a critical OPEC meeting last November, the price of oil has plunged and is currently below $50 per barrel. These low prices and lack of coordination between the countries weakens OPEC’s power as a cartel.
Conflict between the major oil producers of Saudi Arabia and Iran is escalating, as the Saudis banned ships carrying Iranian crude oil from entering the country’s waters or utilizing its infrastructure in April. The ban has escalated the conflict between the countries and made Iran even more unwilling to cooperate. The Saudi’s have even threatened to increase production by up to a million barrels a day which would vastly lower the price of oil simply to hurt Iran.
So far, OPEC’s power is weakening because Russia has supported Iran’s position, likely to protect its political interests elsewhere. “Iran has a special situation as the country is at its lowest levels of production. So I think, it might be approached individually, with a separate solution,” Aleksander Novak, Russia’s energy minister, told the state media company Russia Today in March.
However, this will only work to a point. If the Saudis continue increasing oil production to keep the prices low, it could be devastating to Russia. Low oil prices caused the Russian economy to contract by 3.7 percent in 2015. Russia’s economy will keep shrinking unless oil prices recover to at least $80 per barrel, according to the Energy Research Institute of the Russian Academy of Sciences.
Saudi Arabia can increase production because it can likely handle cheap oil better than other OPEC countries, but even it is expecting a budget deficit of $140 billion — roughly 20 percent of the Saudi economy. When compared to 2013’s surplus of $48 billion, the fiscal outlook for the Kingdom looks so dire that the International Monetary Fund warned it could go through its fiscal reserves within five years. Saudi oil export revenues dropped 46 percent in just the last year and the country is selling bonds for the first time since 2007.
Saudi Arabia and Iran have a long-running rivalry, with its roots in religion. Saudi Arabia is a Sunni Islam country, whereas Iran is the home of Shia Islam. The two countries have been engaged in proxy power struggles over the last year, but the Saudi execution of a popular cleric in January immeasurably worsened diplomatic relations.
Cheap oil is good news for America and other net oil importers, especially for the poorest members of society who spend a larger proportion of their incomes buying oil products.
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