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The political hydraulics of OPEC

Iraq and Iran vie to best Saudi as the world's leading producer of oil and it's China that looms as final arbiter.

If Iraq can actually deliver that much oil, it would challenge Saudi dominance as OPEC’s “swing producer”— the one mega-producer that can tweak the global price of oil by adjusting the spigot of its own production.

The Saudis do not seem overly troubled by this prospect. They apparently share the view of many analysts that quadrupling production in the space of seven years is easier said than done.

“I think that some of these oil companies have overstated how high they can take Iraq’s oil production,” said Kristian Patrick Alexander, a political scientist at Abu Dhabi’s Zayed University.

Among the factors that could slow the Iraqi project, Alexander mentioned the likely eruption of violence, especially with U.S. troops scheduled to complete their withdrawal by the end of 2011; the absence of a comprehensive oil law guaranteeing the legality of the deals with foreign companies; rampant corruption; a lingering dispute over control of oil fields in Kurdistan and, finally, the decrepit state of Iraq’s overall infrastructure.

“The projections [of 10 million to 12 million bpd] are somewhat optimistic,” he said.

If the Saudis can afford to take the long view of Iraq’s reintegration into OPEC, Iran can’t.

“Iran is much more vulnerable to declining prices and declining revenues. Saudi Arabia just doesn’t need the money to the same extent,” said Luciani, the industry analyst.

Even if its oil output is surpassed by Iraq, Iran would remain the dominant political and military power in the Gulf. But being out-pumped by Iraq is likely to make Tehran feel an even greater urgency to develop its nuclear capability in order to maintain its status.

The key player may turn out to be China, the world’s No. 2 energy importer. The Chinese are heavily dependent on Iranian oil and, as a result, Beijing for years has tried to shield Tehran as much as possible from the economic sanctions the U.S. and its allies would impose.

But that is changing. Now that the China National Petroleum Corporation has signed a major deal with Iraq, Beijing is signaling a new willingness to consider sanctions. And with the encouragement of the Obama administration, Saudi Arabia and other Arab oil producers are giving the Chinese quiet assurances that they will cover any decline in Iranian production resulting from sanctions.

All of this is bad news for the government in Iran, where any drop in oil revenue will make it increasingly difficult for an unpopular regime to hold on to power.

 

http://www.globalpost.com/dispatch/commerce/100411/opec-oil-uae-middle-east