Analysis: Politics trumps policy as OPEC falls apart

VIENNA Wed Jun 8, 2011 4:14pm EDT

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VIENNA (Reuters) - OPEC's shock failure on Wednesday to reach agreement breaks with a long tradition of putting output policy above even the most intense political rivalries.

Turmoil across the Arab world and a deepening divide between OPEC's two biggest members Saudi Arabia and Iran was always expected to complicate the group's response to oil prices that climbed to around $118 a barrel on Wednesday.

But until the last moment, analysts and markets anticipated at least a small production increase could be agreed if only to legitimize leakage already taking place above output targets.

Instead, ministers didn't bother even trying to present the meeting as a decision to maintain existing production targets, although in public they linked their failure to agree to differing views of demand rather than their political opinions.

"It is absolutely amazing," said Alirio Parra, Venezuela's oil minister from 1992-1994 and a former OPEC president. "This is not market leadership."

OPEC Secretary General Abdullah al-Badri told a hastily-convened news briefing ministers had different numbers on demand, but OPEC was "not in crisis."

Saudi Oil Minister Ali al-Naimi said the Organization of the Petroleum Exporting Countries retained its status as an economic organization, not a political one.

"You know that Saudi Arabia over the last 16 years or so has worked very, very hard to depoliticize OPEC. We have succeeded," he told reporters.

Whatever OPEC as a group decides, Saudi Arabia as the holder of the bulk of the world's spare capacity, can always add supply if it sees demand for more oil.

That makes it all the more surprising that a 50 year-old group that has maintained a semblance of unity through two Gulf Wars and the bitter, protracted Iran-Iraq war could not muster support for a deal that might makes little difference to supply.

OLD ENMITY, NEW INTENSITY

The leading opponent to the Saudi-led push for more oil to calm a volatile oil market was Iran.

The two powers have long disagreed over oil prices, with Saudi Arabia favoring moderate prices to preserve demand for its vast reserves for the long term and to nurture ties with the world's leading consumer the United States.

Iran has clamored for higher prices in part to meet its own domestic budgetary needs and not just to annoy the West.

Shi'ite Iran's differences with Sunni Saudi Arabia have intensified over Bahrain, where the Shi'ite majority has been protesting against the country's minority Sunni rule.

Venezuela, has traditionally sided with Iran in OPEC and on the wider world stage, and was among seven countries opposed to its decision to raise OPEC output.

Venezuela's Oil Minister Rafael Ramirez told reporters each minister had "a different view of how demand will be."

But the stance was made much more political by Venezuelan President Hugo Chavez's statement on Tuesday that there was no need for more oil, which he made at a shared news conference with President Rafael Correa of Ecuador, OPEC's smallest producer.

Venezuela's long-standing differences with the United States, as well as with Saudi Arabia, have been aggravated by U.S. sanctions against its state-oil company PDVSA for supplying Iran an oil blending component in defiance of U.S. law.

"They want higher prices than us and after U.S. sanctions on PDVSA, Venezuela doesn't want to do the Americans any favors," one Gulf delegate told Reuters.

The other opponents were Angola, Iraq, Algeria and Libya.

Breaking a silence of several days, Naimi, who had only the backing of his fellow Gulf producers, told reporters the meeting was "one of the worst" he had known.

"In my past 16 years as oil minister, I have not seen such an obstinate position," he said.

DEMAND, POLITICS

Analysts said there was genuine uncertainty about future oil demand as world economic recovery faltered, but they said politics had to be a factor in Wednesday's lack of accord.

Before Wednesday's OPEC conference, David Kirsch of PFC Energy in Washington had said the backdrop of Middle Eastern unrest meant it was taking place "in arguably the most contentious political setting in more than a decade."

A collective lack of experience around the OPEC table, with around half the ministers new or mere caretakers, contributed.

"There were so many junior ministers or people below ministerial level, Naimi was unable to engage with them," Kirsch said.

One of the brand new representatives was Iran's Mohammad Aliabadi, whose last job was head of Iran's Olympic committee.

He was appointed caretaker oil minister last week after President Mahmoud Ahmedinejad withdrew his threat to attend

OPEC.

Another was Libya's Omran Abukraa. He was named to head Libya's OPEC delegation after the defection of the nation's top oil official Shokri Ghanem last week and only arrived in Vienna hours after Wednesday's meeting had begun.

He could have found himself at odds with one of Naimi's Gulf allies Qatar, which has helped rebels opposing Libyan ruler Muammar Gaddafi, to market their crude.

Such tensions are not expected to disappear quickly.

If Naimi wants to avoid further disarray, he has work to do.

"It could be a bit of a wake-up call that they (Saudi) need to up their diplomacy to sway some key states their way," said Samuel Ciszuk of IHS Global Insight.

"At times of heated politics or ideological reasons, Saudi (has) struggled to dominate as much as it could have given its size vis-a-vis others in OPEC."

Riyadh would be anxious to reassure the world's biggest oil consumer it had done all it could so far, analysts said.

"The Saudis would have liked the gold star for political good behavior," said Katherine Spector of Canadian Imperial Bank of Commerce in New York.

The Iranians and Venezuelans, meanwhile, are producing all they can and have only negative political points to score with the United States.

"The only way they get extra revenue is from a higher price. And they aren't going to get any gold stars from the U.S. or Western powers that be anyway," Spector added.

(Additional reporting by Daniel Fineren, Alex Lawler, Amena Bakr and Emma Farge in Vienna and Christopher Johnson in London)

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