Talking Turkey: What Will OPEC Do?

NOTE: This story was updated Thursday morning.

UPDATE: OPEC delegates decided not to cut production at the meeting in Vienna, rolling over the cartel’s current level of oil output, and sending oil prices immediately lower to four-year lows. The group will meet again in June, which means that cheaper oil could be a fixture for the first half of next year. Media reported that delegates from countries such as Venezuela and Iran were very disappointed with the decision.

For the first time in six years, the Organization of the Petroleum Exporting Countries’ meeting in Vienna on Thursday actually matters. But in the grand tradition of cartels everywhere — and this oil-pumping one in particular — internal discord, conflicting agendas, and vastly different thresholds for pain are conspiring to make it all but impossible to reach agreement on cutting oil production, which is needed to reverse a sharp and prolonged downturn in global oil prices.

In a nutshell: Those that need prices to rise won’t cut production. Those that don’t need prices to rise could cut, but probably won’t. And those that need a cut and could cut won’t either, since no one else seems to want to.

So though there will be plenty of Thanksgiving afternoons filled with acrimony, shouted accusations, bitter resentments, and unspoken ire, few will likely rival OPEC’s own dysfunctional Thanksgiving in Vienna on Nov. 27.

The oil market fundamentals are pretty clear: The world has more oil sloshing around than it really needs. Partly, that’s because oil-producing countries outside the cartel, especially the United States, have ramped up crude output. Partly, it’s because OPEC, which produces about one-third of the world’s oil, has kept the pumps running nearly flat out despite all the trouble in the Middle East. And partly it’s because much of the global economy, from Brussels to Beijing, is sputtering, which depresses demand for oil.

Put together, that mismatch has pushed benchmark oil prices down almost one-third since summertime peaks. On Wednesday afternoon, ahead of the OPEC meeting, crude prices in New York and London were stable at about $74 and $78 a barrel, respectively. In June, prices reached $115 a barrel.

For countries that live and die by exporting oil, both inside and outside OPEC, that decline in prices is bad news. Some, such as Russia, Venezuela, Iran, and Iraq, desperately need oil prices to return to stratospheric levels so they can stanch the bleeding in their national budgets.

Others, especially the big and wealthy oil giants of the Persian Gulf, are less worried. Still other big oil producers, such as the United States, are watching OPEC’s meetings with a wary but different eye: Oil prices don’t matter for government revenues, but cheaper oil could well kneecap the remarkable boom in newfangled U.S. oil production that requires relatively high oil prices to be profitable.

On paper, OPEC’s dilemma seems to have a simple solution: Cut oil production by a significant amount and watch crude prices jump back above $90 a barrel. That would make life easier for the well-off countries, make life more bearable for the basket cases, and keep the U.S. oil boom in business. But as Clausewitz said, "Everything is very simple in War, but the simplest thing is difficult."

Start with the key question: Which countries, exactly, would cut production? The countries that most need prices to go back up — Iran, Iraq, and Libya — are said to be exempt from taking part in any OPEC output cuts because they’ve had such a hard time even maintaining normal crude production. (Libya’s situation is so confusing that there are two rival oil ministers vying to represent the country at the OPEC meeting.) Venezuela said it would cut if everyone else did, but the country’s anemic crude output doesn’t leave it a whole lot of room to do the heavy lifting.

That leaves OPEC’s big players, especially Saudi Arabia, the United Arab Emirates, and Kuwait, to shoulder the burden. Even though those countries have bulging piggy banks and can best withstand a period of lower oil prices, they’re not champing at the bit to curb production. What’s more, everybody inside OPEC is determined to protect their market share, lest they cede more ground to newcomers like the United States.

Saudi Oil Minister Ali al-Naimi flagged Riyadh’s reticence when he said Wednesday that the "market will stabilize itself." The United Arab Emirates’ oil minister echoed that line, telling Reuters, "This is not a crisis that requires us to panic." He suggested that everybody, inside and outside the cartel, share the pain of prospective cuts.

Not so fast, responded Russia, which is not a member of OPEC. Although Moscow desperately needs oil prices to go back up — the price slump has hit the Russian economy even harder than U.S. and European sanctions have — it made clear it’s not going to make any sacrifices to change the situation. The boss of Rosneft, Russia’s biggest oil company, said the country will keep pumping even if oil falls to $60 a barrel.

So when the smoke clears in Vienna, what might be decided? There is a range of unpalatable options with different implications for oil prices.

OPEC could do nothing at all, which would almost certainly send oil prices lower. OPEC could decide to actually respect its current production quotas, which it habitually ignores; that would amount to an effective cut of about 300,000 barrels a day. But oil prices would likely fall anyway.

OPEC could herd its cats and agree to a real cut, on the order of 500,000 to 1 million barrels a day. But given the sloshy market, that probably wouldn’t be enough to boost oil prices very much, if at all.

And finally, OPEC could surprise everyone and make a serious production cut in excess of 1 million or 1.5 million barrels a day. If the market believes those cross-my-heart, hope-to-die cuts would actually happen, that would be enough to send oil prices back up — for a little while.

But it would also greenlight further U.S. oil output, which would make the market sloshy all over again — and give OPEC something to fight about at its next meeting.