(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON May 31 If OPEC is eventually forced to
trim its oil exports in response to the shale boom, Saudi Arabia
will have to shoulder most of the production cuts.
Past experience suggests Saudi Arabia would have to absorb
about two-thirds of any cutbacks even though it accounts for
only one-third of the organisation's exports.
Riyadh's views about the acceptability of current prices,
and whether to cut production to sustain or move them higher,
will therefore remain decisive, as they have throughout the last
Saudi Arabia's role in the organisation has always been
Saudi Arabia has expanded its production capacity relatively
easily over the past 30 years, while political instability,
sanctions and war have left other major producers such as Iran,
Iraq, Venezuela, Nigeria and Libya with stagnant or declining
Unlike its main allies - Kuwait and the United Arab Emirates
- Saudi Arabia has a large and comparatively poor population, so
it is much more vulnerable to any reduction in oil revenues.
The kingdom has as much interest in relatively high prices
as other members. But it has a unique stake in production
growth, since it has both the capacity to capture marginal
demand, and knows it will shoulder the bulk of any cutbacks
needed to defend prices.
In recent months, some analysts have openly wondered if
unilateral production changes by the Saudis have sidelined the
rest of OPEC, or alternatively how the organisation as a whole
will respond to the threat posed by fast-growing shale in the
United States and rising conventional output from Iraq as well
Both questions make the mistake of assuming the organisation
has functioned in the past, or will function in future, as a
"cartel" of near-equals. OPEC has never functioned like this,
and is very unlikely to start doing so any time soon.
OPEC is not, in any real sense, a "cartel" that routinely
allocates production, investment or customers. Since the 1980s,
OPEC has instead functioned as a framework through which Saudi
Arabia seeks contributions from other members for its own
decisions to cut production (with more or less success).
It also provides analytical support, and an opportunity for
dialogue, which is particularly valuable for the smaller and
less sophisticated members.
In the next five years, the decision about if and how to
respond to North American shale, as well as rising output from
Iraq and Latin America, belongs to Saudi Arabia alone.
If the kingdom's policymakers do decide to act, they will
undoubtedly seek some degree of burden-sharing, and have to
decide whether to threaten a volume war to secure it.
Saudi officials resist the idea the kingdom should play the
role of "swing producer", and always push for more equitable
In practice, however, Saudi Arabia has secured only limited
contributions to voluntary production restraint from other
In 1985-86, 1998-99, 2001-02 and again in 2008-09, Saudi
Arabia was decisive in pushing members to cut production in
order to stabilise prices, and in every case ended up accepting
more than its proportionate share of the export reductions.
Data on OPEC members' oil production and exports remains
poor in terms of its timeliness, completeness, consistency and
accuracy. Assessing the level and distribution of cuts is
OPEC members usually frame their agreements in terms of
production, though it is exports that matter most for prices.
The organisation's membership, and hence its export profile,
has changed significantly over time, with Gabon and Indonesia
leaving the system, Ecuador suspending its membership between
1992 and 2007, and Angola joining in 2007.
Recent moves to improve transparency, such as the Joint
Organisations Data Initiative (JODI), supported by OPEC and the
International Energy Agency (IEA), among others, have resulted
in only modest improvements in the data.
OPEC, IEA, JODI and the U.S. Energy Information
Administration (EIA) all have differing estimates for OPEC
countries exports and/or production levels, with varying levels
The result is a good deal of confusion. However, the time
series all tell the same basic story. In every instance of
restraint, Saudi Arabia cut much harder than other members.
Saudi Arabia's share of total OPEC exports has averaged
about 33 percent since the mid-1980s, and been very stable at
this level since 2000 (link.reuters.com/rym58t).
But among core OPEC members (excluding Gabon, Indonesia,
Ecuador and Angola) the kingdom's share of export reductions has
ranged from 62 percent in the early 1980s and 70 percent in 1999
to 38 percent in 2000-2002 and 58 percent in 2008-2009.
Saudi exports currently account for a higher than usual
share owing to sanctions on Iran, as well as continuing
production problems in Libya and Nigeria. So the first tranche
of any future production cuts will almost certainly come from
the kingdom, either within or outside the organisation's formal
For now, Saudi policymakers profess to be unconcerned about
rising oil output in the United States and elsewhere, and
content with the current level of prices, which are close to
their preferred level of $100 per barrel.
The sustainability of prices at $100 per barrel remains
hotly debated. Estimates for the long-term cost of oil range
from $70 (based on North American shale plays) to $105-110 or
even more (based on rapid cost inflation for more technically
challenging mega-projects) depending on which sort of supplies
will be needed to meet the marginal demand.
There is also considerable uncertainty about the potential
of shale plays outside the United States, supplies from Iraq,
and the continued reduction in oil demand resulting from energy
efficiency measures in the United States, the European Union and
key emerging markets such as China.
If the shale revolution can be sustained in the United
States, and successfully exported to other countries, some
combination of OPEC production cuts or lower oil prices to
encourage demand and forestall more investment, will be
inevitable by 2015-2016.
If and when the time comes, the key decisions will be made
in Riyadh - not at OPEC headquarters in Vienna, and not in the
capitals of other members.
(Editing by James Jukwey)