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OPEC holds quotas, rebuffs Bush

Economic growth, Oil markets
By Paul Hodges on 04-Feb-2008

OPEC’s decision to hold its production quota at last Friday’s meeting came as no surprise to the markets, which were busy taking prices down $2/bbl on renewed fears of a US recession. But it did produce a warning from the International Energy Agency (IEA) that OPEC’s policies ‘threaten the strength of the global economy’.

The decision also tells us something very significant about current oil market politics. Because it was only last month that President Bush had made a direct appeal to the Saudis to lift oil production. And there have only been two previous occasions when a sitting US President has failed to influence OPEC discussions via the Saudis.

The first was in 1973-4, in the aftermath of the ‘Yom Kippur’ war, which resulted in OPEC oil embargoes. The second was in 1979-80, during the Iran hostages crisis. At all other times, the relationship between the US and the Saudis has been based on the close personal linkages established at the famous Valentine’s Day meeting 62 years ago between Saudi Arabia’s King Abdulaziz and then US President FD Roosevelt.

Saudi Oil Minister Naimi was typically Delphic in his comment after the OPEC meeting, commenting that ‘supply and demand are equal, and global reserves are fine’. And it is true that the Saudis have increased their own production to 9.2mbd in response to US requests. But probably two factors caused this historic rebuff to take place:

• Pragmatic. As noted at the time of the last OPEC meeting, the La Nina weather system generally produces mild winters on the US East coast. This has happened in 2008. Equally, the severe winter storms in China (attributed by government meteorologists to La Nina), will reduce demand still further, just as it normally takes a seasonal dip.
• Politics. It is probably hard for the Saudis to force through an OPEC increase with so much political tension around the Middle East. The US threat to bomb suspected Iranian nuclear facilities is clearly creating major tension in the region, and it would be difficult, if not impossible, for the Saudis to respond to a US appeal at the moment.

Quite why, in the light of these factors, President Bush chose to issue his personal appeal must be a matter of debate. History, as well as the IEA, is warning us that its rejection implies that oil markets are likely to stay difficult for some time.