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OPEC differences over the dollar

Broadcast Mistake Highlights OPEC Differences over Dollar

OPEC sought to deliver a united message focusing on climate change and security of supply in what was just the third head of state summit meeting in the 47-year history of the organisation; however, a broadcasting error instead highlighted growing divisions within OPEC.

Global Insight Perspective


Significance

This unusual OPEC meeting was aimed at focusing on long-term issues, but with oil prices hovering near US$100/b and Iran and Venezuela determined to engage in political grandstanding the muted climate change statement was overshadowed by conflicting views of the U.S. dollar.

Implications

It became clear, when a closed session was broadcast to the waiting journalists in error, that Iran and Venezuela are eager to push OPEC away from dollar-denominated oil sales. The Saudis rebuffed an attempt to express concerns over the falling U.S. dollar, but the broadcasting error showed a growing division emerging within the organisation over dollar-denominated oil sales.

Outlook

Politics is clearly a factor in Venezuela and Iran’s push to move away from the dollar, but the issue cannot be discounted as a concern for other members as well. The organisation will ostensibly take up the debate once again when the next scheduled OPEC meeting occurs next month and although the Saudis clearly support maintaining the dollar, further falls may see Iran and Venezuela gather support for a more varied pricing policy.

Open Mic

OPEC’s third head of state summit in the organisation’s 47-year history had already been overshadowed by media questions about short-term production when a broadcasting mistake derailed OPEC’s planned agenda yet further. With journalists sequestered in a room where the proceedings in the main conference room were broadcast, it quickly became clear that the television pictures being sent through were not meant for public broadcast. An engineer had erroneously left the connection live during a closed session with OPEC only aware of the mistake when a Reuters wire report came through detailing the debate that was at that moment taking place among the heads of state. The rare window into the inner workings of OPEC revealed a contentious debate on the U.S. dollar. Iran and Venezuela pressed for a statement expressing OPEC’s concerns over the falling value of the dollar and for further discussions on oil pricing. Saudi Arabia vetoed a proposal that would have clear political implications, but the debate highlighted the divisions emerging within OPEC over wider policy issues.

Political Divisions

Venezuela and Iran are now spearheading a push towards higher prices with a strong political aim in mind—undermining U.S. economic and political power. The presence of Ecuador at the meeting, which has now been formally re-admitted into OPEC, further tilts the political balance towards the Venezuelan and Iranian camp. While the Saudis continued to maintain that OPEC’s success lay in its commitment to meeting global-oil supply needs and adopting a conservative approach to policy, the Iranian and Venezuelan position regarding the dollar has appealed to some of the more pragmatic members of the organisation. Iran’s President Mahmoud Ahmedinejad claimed that other members discussed with him the prospect of moving out of dollar reserves and into other currencies. While the sharp falls in the dollar over the past year have been matched by a surge in prices that has helped compensate, the purchasing power of dollar-denominated reserves held by OPEC members has fallen. This is a genuine concern for many OPEC members, but any move away from the dollar contains risks in itself. Such a move would force even more selling in international financial markets, and with substantial amounts of OPEC capital invested in the United States this would risk damaging its long-term investments. Iran and Venezuela are largely immune to such concerns, but for the Saudis this is a real problem, and the political fall-out would also be significant. Venezuela and Iran both capitalised on the leaked broadcast by issuing some even stronger statements—Ahmedinejad said that the United States gets OPEC oil exchange for “worthless paper” while Venezuela’s President Hugo Chavez said the fall of the dollar was in fact “the fall of the American Empire”. Such statements cannot have been welcomed by the Saudis.

According to Iran’s Oil Minister, Gholam Hussein Nozari, OPEC will now establish a committee to look into the impact of the falling dollar. There are also reports that the issue will be discussed at OPEC’s next scheduled meeting in December. It seems clear that the discussion surrounding the U.S. dollar is far from over.

The Lost Agenda

While the press focused on the splits over the dollar and on OPEC’s insistence that no new production was required despite an oil price hovering just below US$100/b, OPEC’s planned agenda on supply security and the environment was largely ignored. In fact, the statements on these issues, the primary reason for the meeting, were rather benign. OPEC offered its support to combat climate change, but urged that no extreme measures on cutting carbon dioxide should be agreed at the Bali meeting next month, where a successor to Kyoto is to be discussed. The Saudis highlighted a new US$750-million fund to reduce carbon emissions, but also urged that petroleum should not be specifically penalised in efforts to reduce emissions. The point was again made that developed economies were subsidising renewable and alternative energy, and expressed some concern that climate change concerns may be being used as a pretext by developed countries to move away from oil. Once again, OPEC also stressed its commitment to meeting global demand with oil as it is needed, and again said that it had legitimate concerns to ask on security of demand as well as the questions it fielded on security of supply.

Outlook and Implications

The divisions surrounding oil pricing and the U.S. dollar are clearly grabbing the headlines. The same issue will again be a prominent source of debate at OPEC’s December meeting, when supply questions will also come to the fore once again. While OPEC is unlikely to change its position regarding supply in the current conditions, even with a possible oil price in excess of US$100/b, the commitment to the dollar is something that may move over time. While the Saudis still hold the upper hand within OPEC, and can veto any proposals, there is a definite effort now under way by Venezuela and Iran to press for the end of dollar dominance in the oil market. There is certainly a none too subtle political subtext to all of this, but the declining purchasing power of dollar reserves is a genuine source of concern. While OPEC’s instincts are conservative, and a move away from the dollar may not ultimately be a wise economic move for OPEC members, continued weakness will rally supporters to the Iranian and Venezuelan cause. The debate will only intensify, and the further the dollar falls, the more risk there is of OPEC members acting alone.

By Simon Wardell an energy analyst for Global Insight International.
(Simon.wardell@globalinsight.com). Global Insight's Energy Group provides independent, comprehensive analysis, forecasts, data, and of the worldwide energy marketsplace. Petroleumworld does not necessarily share these views.

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Petroleumworld News 11/23/07

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