A Tough Background For OPEC.

That was precisely what worried Saudi Minister Na'imi on Oct. 24. At first, he resisted the 1.5m b/d production cut, which was pushed strongly by Algeria and Libya - with Iran and Venezuela having actively lobbied all the other OPEC members for a major reduction in the group's output ceiling.

Initially the group had widely divergent views on the depth of the cuts to be made; but as paper oil prices fell and put options indicated that traders were betting that prices could slip to $50/b or to a lower level, Saudi Arabia and the other OPEC members agreed they had to act decisively. Saudi Arabia was worried that, with its state budget for this year based on a crude oil price level of $50/b and with no floor in sight for paper oil, prices of physical crudes could collapse. Like the other members of OPEC and most non-OPEC fossil fuel exporters such as Russia, Saudi Arabia's economy is still heavily dependent on the price of crude oil.

Rafael Ramirez, Venezuela's energy and petroleum minister, was a key lobbyist among OPEC members calling for a big cut in production. Ramirez is a puppet of populist President Hugo Chavez, who is one of the most hawkish figures in OPEC and a close ally of Ahmadi-Nejad. Strongly backed by Iranian Oil Minister Gholam-Hossein Nozari, Ramirez said OPEC had to "avoid a price collapse like in 1998", when Asia's financial crises eventually pushed paper WTI and paper Brent to less than $10/b.

Na'imi was the OPEC minister held responsible for the 1998 collapse in oil prices. In OPEC's November 1997 OPEC ministerial conference in Jakarta, he got the group to raise its crude oil production by 2m b/d. Like fellow OPEC members, Na'imi had not foreseen that the financial weakness of Asian economies was about to trigger a deep recession in that part of the world. Oil prices began to fall rapidly after that OPEC meeting. It took huge efforts at oil diplomacy within OPEC and between the group and non-OPEC exporters in 1998 and early 1999 to reach an OPEC/non-OPEC agreement to defend oil prices by cutting production and exports.

That agreement, reached in March 1999, led to a steady rise in world crude oil prices in the subsequent months. OPEC's summit in Caracas in September 2000 featured the role of Chavez as the champion of resource nationalism in the developing world - a trend to be taken up by then Russian President Vladimir Putin, who now is Moscow's top decision maker since becoming PM on May 7, 2008 (see omt11RusWho-Sep8-08)- and was occasioned by an energy crisis in California as by then the world had become short of capacity across the world's energy supply chain - with no new oil refinery having been built in the US since 1976. Prices fell after the 9/11 Saudi-Neo-Salafi attacks against the US, which caused a brief global recession that pulled paper WTI to the low $20s.

In the mid-1980s, then Saudi Petroleum and Mineral Resources Minister Ahmad Zaki Yamani had waged a price war against the Shi'ite theocracy of Iran, which at the time was beginning to turn the tide in its war with Saddam Hussein's Iraq in its favour. He let oil prices fall in favour of market share, through odd netback deals with the majors, which led crude oil prices to crash below $8/b in the summer of 1986. But, apart from a devastating effect on Iran's economy which eventually forced Imam Khomeini to accept a truce with Iraq in August 1988, Saudi Arabia and fellow OPEC states suffered a great deal. Some of Saudi Arabia oilfield's reservers had been damaged since mid-1985, when the Ghawar axis of fields produced less than 1.5m b/d from over 5m b/d in previous years.

Later in 1986 Saudi Arabia had to work very hard to get fellow OPEC members to lower production through strict quotas and defend prices, with Riyadh switching away from a costly market share strategy. Since then, Riyadh has become convinced that its strategy to defend the long-term viability of conventional petroleum against alternative sources of fuels must be carefully balanced with what should be considered a fair price for energy between world producers and consumers.

After the meeting, Na'imi on Oct. 24 hinted that OPEC could meet in the short term, even before the planned Dec. 17 ministerial conference in Algiers. He said: "We're prepared to meet more often to stabilise the market". OPEC's current President Chakib Khelil of Algeria then explained that the total reduction in the group's output would amount to as much as 1.8m b/d, or 6%, as members will first cut 300,000 b/d they were producing in excess of the group's ceiling and then implement the 1.5m b/d decision.

Russia Plans Swing Producer Role To Influence Prices: Moscow's 1st Deputy PM Igor Sechin who is in charge of his country's energy sector on Oct. 22 said Russia would become a swing producer of crude oil to influence global energy prices, OPEC Secretary-General Abdullah al-Badri of Libya met with Russian President Dmitry Medvedev and discuss an exchange of market data. The resurrection of a decade-old idea of a big oil reserve came as another sign of Russia's growing ties with OPEC, which has unnerved global consumers already worried by talks between Russia, Iran and Qatar to create an OPEC-style gas exporting group.

Sechin, a Kremlin insider and close Putin aide, said: "The Ministry of Energy is considering creating an oil production reserve, which would allow it to work more efficiently with prices on the market". Asked how big the reserve should be, Sechin told reporters: "Enough to reach efficient pricing parametres". Russia is the biggest oil producer outside OPEC and the world's second-largest crude oil exporter after Saudi Arabia - as well as being the world's biggest producer and exporter of natural gas. Badri, who visited Moscow on Oct. 21-22, said: "The reason [for his meeting with Putin's hand-picked President Medvedev] is absolutely obvious. Russia is also a major producer and exporter of [crude] oil and is interested in maintaining stable, predictable prices".

Badri said he liked the reserve idea, adding: "Russian reserves (surplus crude oil output held in storage) can help global oil shortages... This idea is good. It is a technical matter". He said he did not ask Russia for a cut in production. Russia will actually reduce exports and the crude oil retained will be stored for sale when paper WTI and Brent prices rise above levels threatening conventional petroleum. This strategy, which has long-term implications in favour of nations rich in fossil fuels, partly fit in with that of Saudi Arabia.

Russia has long toyed with the idea of an oil reserve, which could allow it to become a swing producer. But the expensive and logistically difficult plan was never implemented as the government and private companies failed to reach a compromise on the project. The current oil production scheme in Russia does not allow the country to change its flows significantly as any well shut down in Siberia usually leads to its costly repair.

IEA Executive Director Nobuo Tanaka said he was worried by Russia's production outlook as the country in 2008 headed for its first annual output decline in a decade, stating: "We see worrying signs in some producing countries, including Russia, in the ability to invest enough to meet demand. We see Russian supply growth slowing, with all projects declining in production over the next decade. Further government incentives would be welcome to increase production". Russian oil firms have called on the government to ease taxes and slash export duties in November, one month earlier than planned, because of a steep price decline this month. Sechin said the idea was being discussed but no decision had yet been taken.