Oil prices are too low for the taste of the Organisation of the Petroleum Exporting Countries (OPEC), notable among them Saudi Arabia. So, as expected, the oil producers’ group has agreed in principle to take action to try and lift the price, in the shape of a target for how much the member countries will produce.
Currently, OPEC consists of 14 members, more than half of them in the Middle East and North Africa, including the organisation’s biggest player, Saudi Arabia.
Thus, the Minister of State for African Affairs and Special Envoy of King Salman Bin Abdulaziz, Custodian of the Two Holy Mosques and King of Saudi Arabia, Mr Ahmad Qattan, was, this week at the State House in Abuja, to seek the support of President Muhammad Buhari to cut production and raise oil price.
The envoy said the King Salman sent him to request the president to ensure Nigeria’s compliance with quotas assigned to OPEC members in January. Specifically, he said the king wants Nigeria to exit from list of countries exempted from output cuts.
He said Saudi Arabia had reduced its own output by 1.4 million barrels per day to ensure that prices went up. But, tellingly, he said that Saudi Arabia, alone, cannot bring stability to the oil market and shore up prices, a situation Nigeria needs to execute its social investment and other development programmes.
Expectedly, the president pledged the cooperation of Nigeria in that regard in order to attract higher prices in the global market. He said, however, that output cuts is difficult for Nigeria to implement, considering the country’s peculiar circumstances of large population and underdevelopment.
“I have listened carefully to the message,” Buhari said….I know that it is in our interest to listen. We will cooperate,” he said.
And when the president said higher oil prices would make both nations stronger and their citizens more prosperous, of course, he couldn’t have said and made Nigeria’s readiness to cut its production better and clearer.
However, while the Saudi initiative is laudable and, as the president said, in the interest of Nigeria, it has taken rather long to come. It has taken the OPEC a long time to agree that they need to put some sort of wedge on production.
Lest it’s forgotten, the rise of the US shale industry in the last ten years is one of the main factors driving prices lower and the development has transformed the market in the US for crude oil.
The US, hitherto major importer of oil, now needs to import less oil and this impact has reverberated throughout the international crude oil market.
When, owing to the activities of the US shale industry prices fell, OPEC, led by Saudi Arabia, refused to act. The group did not cut production as in previous cases of falling prices in an attempt to reverse what many regard as an unwelcome development.
It is true that some OPEC members would have liked to see production cuts, especially if the efforts were led by Saudi Arabia as it had often been in the past, but the all-important Saudis were reluctant, partly because they wanted other OPEC producers to take more of the burden of cutting, it is thought, and partly to hurt the American industry.
The Saudi strategy was said to be to allow prices to stay low to hurt US shale oil producers and force some out of business. But the strategy of maintaining the price pressure on US shale failed to get the results the Saudis wanted.
So, the Saudis are championing the more traditional OPEC approach of cutting production in response to prices they consider too low, in a bid to drive them higher.
Still, as good as it is, pushing price higher could prove difficult. As always with OPEC, countries are keen on the higher prices but less keen to make the production cuts themselves.
In fact, OPEC members have a history of failing to comply with their own output limits. Several countries, including Nigeria, have reservations about reducing their own output mainly because their national budget are based on the current output.
Therefore, to achieve the Saudi goal of cutting production, OPEC needs support of some non-members, notably Russia, to cooperate and make cuts themselves.
For now, even more problematic for the Saudi initiative is the danger that if OPEC members can agree something that pushes prices up, American shale producers will be able to make advance sales at those higher prices.
That would enable them to keep producing without being hit even if prices do slip back later, which could happen if OPEC fails to comply with any production limit to which it might agree.
So, in the end, what is needed from OPEC members before, during and after an agreement to cut production is reached, is commitment and sincerity of purpose. Above all, OPEC members should remember that the planned prices increase is, like President Muhammadu Buhari said, in the interest of all.
