OPEC Alliances And Unpredictability

How OPEC has changed course, a recap of an article written in May 2019 illustrates the unpredictable odyssey of the oil market and the impact of geopolitical interests

The real special relationship is the one that exists between the US and Saudi Arabia and it is the one that poses an existential threat to OPEC. I am inclined to agree with Iran’s oil minister Bijan Namdar Zanganeh as he warns that OPEC is on the verge of collapse because some members are targeting their fellow producers. His remarks came after the Trump administration tightened sanctions on Iran’s oil exports on Thursday. The White House says Saudi Arabia and the UAE have agreed to offset the drop in supplies, even though OPEC has agreed to cap output through June. Saudi Arabia are yet to formally confirm this agreement stating only their   ongoing obligation to ensure that the market is supplied with adequate crude and prices are stable. Iran told the OPEC on Sunday that no member country should be allowed to take over another member's share of oil exports, this in direct response to Saudi Arabia's apparent offer to pump more oil thus increasing the efficiency of US sanctions on Iranian oil.

That regional rivals  Saudi Arabia and  Iranian have been able to co-exist within  OPEC during recent years of political tension and turbulence within the Middle East has always been a tenuous proposition .  Despite effectively  facing off in proxy wars in Syria, Yemen and Iraq, OPEC  has provided a refuge where their shared goal of obtaining the best price for their crude oil production has created an environment of collaboration albeit as a ‘marriage of convenience ’which up until recently has outweighed the political, religious and historical antipathy they share for each other.

Whilst the Iranian oil minister Bijan Namdar Zanganeh attributes Saudi and UAE actions as the reason for the inevitable failure of OPEC, that in my opinion is only a symptom of the  problem and  of OPEC’s demise and its relevance in global oil markets. An increasingly  aggressive Washington propelled by a President that has a long standing enmity towards OPEC has decided to use its relationship with the Saudis to break OPEC.  It is the relationship that sees recent US backing for a Libyan National Army supported by the Saudi's, turning a blind eye to Saudi excesses in Yemen or even the apparent implication of Mohammed Bin Salman in Khashoggi’s death. As long as the House of Saud keeps the oil flowing and uses the proceeds to buy  US Arms,  Washington will support any of their political objectives in the region.

The US under Trump has sought to dismantle and disengage with existing agreements, alliances and organisations. The Trump world view differs substantially from those of his predecessors. He sees the current world order as being restrictive to the US  and its interests whilst  enhancing those of its rivals. The Trumpian response is Schumpeterian creative destruction, that is to destroy or blow up everything with the goal of renegotiating on substantially better terms for the US. This makes organisations such as OPEC which bring weak countries together to form strong alliances which contest his world view are  his targets. This is further illustrated by his interaction with the WTO, the UN, the EU, NATO or his treatment of NAFTA and the TPP.

The difference with this model of Schumpeterian creative destruction is that it requires the US to exercise extra territorial jurisdiction, it creates significant tension amongst  its own allies and seeks to enforce incoherent and unrealistic foreign policy objectives.  The Iranian sanctions are  tantamount to a policy of  regime change to the extent that only a new regime in Iran could fully comply with them.  In a deeply worrying and disturbing development the US, citing new intelligence have accused Iran or its proxies of  preparing to attack American troops or interests in Iraq and Syria. This has led to the Pentagon dispatching an aircraft carrier strike group and Air Force bombers to the Persian Gulf as a deterrent to Tehran. The US have already classified the Iranian armed forces as terrorists as have Iran in a tit for tat exercise. Tehran is defiant and threatens at present to take all necessary measures to block oil and gas flows from OPEC members that are supporting the U.S. sanctions regime.

 It is not a leap to predict confrontation in the Straits of Hormuz in the coming weeks.