Moscow, Tehran and Caracas are discussing measures to prevent the downward spike in global oil prices. But will they succeed?
Venezuelan President Nicolas Maduro, center, enters a hall for a meeting with Russia's President Vladimir Putin, not pictured, at the Kremlin in Moscow, Tuesday, July 2, 2013. Photo: AP
The past few days have seen the Venezuelan government of Nicolas Maduro take measures to defend the price of oil and establish a non-OPEC forum. Venezuela has invited countries outside the cartel to attend a conference that will address the drop in prices, which is beginning to threaten the stability of the country.
Maduro has stated several times on national television that he considers a reasonable oil price to be $100 per barrel. At the same time, he invariably blames the U.S. for increasing production of shale oil, calling it a deliberate ploy to hurt Russia as much as his own country.
Venezuelan Foreign Minister Rafael Ramirez, who is also the country’s former energy minister, recently visited Algeria, Qatar, Iran and Russia. Judging by the reaction of President Maduro, Venezuela’s efforts found support primarily in Iran and Russia.
In Tehran, Ramirez and Iranian Oil Minister Bijan Namdar Zangane were unanimous that current oil prices are too low, and that a more favorable price would be $100 per barrel, in which connection they urged all OPEC countries to take measures to stabilize the market.
The steady drop in oil prices in recent weeks is alarming Iran, which is already suffering from acute social and economic problems. But whether it shares Venezuela’s determination to confront Saudi Arabia on the issue is another question. The latter appears to be satisfied with the current price and has no plans to cut production.
In the near term, Iran is facing a far more important task. Nov. 24 is the deadline for Tehran’s talks with the P5+1, by which date it is due to announce its nuclear intentions to the international community. If the U.S. and the EU lift at least some of the economic sanctions on the country, there will be a surge of Iranian oil in the world market, which will further exacerbate problems of supply and demand. A quarrel with the world’s leading oil producers, such as Saudi Arabia, on production quotas is hardly in Iran’s interests.
In Russia, Venezuela’s top diplomat reached a formal understanding with his counterpart, Russian Energy Minister Alexander Novak, who stated that the two countries had discussed measures to contain the fall in oil prices. He declined to elucidate any particular steps that might be taken.
Venezuela has already made efforts to enlist Russia’s largest oil company, Rosneft. The non-OPEC conference has even been moved from Caracas to Vienna to allow Rosneft CEO Igor Sechin to discuss energy prices with OPEC members. The conference is slated for Nov. 25, and two days later, Nov. 27, will see the start of the next OPEC summit, also in the Austrian capital.
In addition to Russia and Iran, Venezuela is hoping for solidarity from Ecuador and (to a lesser extent) Kuwait, which has signaled that it might express displeasure at Riyadh’s strategy during the OPEC summit.
But will Venezuela’s conference succeed in halting the downward trend in energy prices? Russian experts have reason to doubt such a prospect. According to Forex Club analyst Valery Polkhovsky, “Russia and Venezuela cannot solve the problem of the imbalance in supply and demand by themselves. Saudi Arabia has around 3 million barrels per day of spare capacity. Therefore, to adjust supply and demand in circumvention of the Saudis, they need to cut production by around 4 million barrels per day, which for Venezuela and Russia is too much. A much broader coalition is required.”
Western experts are equally skeptical. According to Andrew Dyson, an oil trader with the London Stock Exchange, Saudi Arabia, the world’s main energy supplier, seems to be fixed on a long-term strategy to counter the market influx of U.S. shale oil. To that end, it plans to keep oil prices low until at least the end of 2015 in order to make shale oil unprofitable.
Perhaps Venezuela’s drive in pushing the idea of an alternative conference comes from the severe economic crisis back home. The drop in oil price has hit Venezuela hardest of all. There are several reasons for that: the growth in U.S. production of shale oil, which by default reduces U.S. oil imports from Venezuela; Beijing’s loss of confidence in Caracas after years of generous financing for the Venezuelan economy, and basic inefficiency on the part of the Venezuelan government.
President Maduro’s ratings have slid to 30 percent (down from 55 percent in April last year, when he took over from the late Hugo Chavez). Inflation in the country is above 60 percent — one of the highest rates in the world. The official exchange rate of the bolivar is artificially set at 6.3 to the U.S. dollar, but on the black market, one dollar sells for 120 bolivars. The country is experiencing a catastrophic shortage of all food products. And in November this year, for the first time in its history, Venezuela was forced to start importing petroleum products from, of all countries, Algeria, hardly an oil major.
In this situation, the only country that can help Venezuela is Venezuela itself.
“I don’t see anyone in non-OPEC volunteering to come to the rescue," Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland, said in an email to Bloomberg News. “Venezuela is in a hot spot, as they have to fear the expected increase of Canadian crude oil to the U.S. Gulf.”
In these circumstances, Venezuela’s attempts to cause a split in OPEC and find support among non-cartel countries to stabilize oil prices smack of wishful thinking. The most likely outcome of the alternative conference in Vienna will be an SOS to OPEC governments from those drowning in the surplus of oil.