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It appears that on Sunday, April 17, the long-awaited oil production “freeze” meeting in Doha, Qatar between some OPEC and some non-OPEC oil producers will finally take place. The idea is that the big exporting countries – Saudi Arabia, Iraq, Russia, Venezuela, Iran, Kuwait, etc. – will meet harmoniously and all agree to not increase the amount of oil they produce above the rate at which they produced in January 2016. In other words, for the term of the agreement or the foreseeable future, the agreeing countries would not produce at a rate greater than they did that month.
Ideally, this agreement will provide some measure of stability to the oil market. Recently this market has seen supply rise without a corresponding rise in demand, but a Doha agreement could set a price floor around $40/barrel – at least that is what many hope. In reality, however, the freeze agreement (if it actually happens) will likely only provide a speculative bump rather than longer term price stability, particularly because a) it is only a freeze and not a cut, and b) this agreement will not be universally accepted amongst all producers
These are the countries that bring the most intrigue to a potential deal:
1. Can Russia be trusted?
Can Russia be trusted to keep a production freeze promise? Trust is a tricky issue when it comes to agreements between OPEC and non-OPEC producers. Russia is currently the top oil producer in the world and its faithfulness to a production freeze is most important.
However, Russia has a history of backing out of oil production agreements with OPEC. Yet there is some reason for OPEC to trust Russia this time. Recent reports have indicated that Russia’s Soviet era oil fields are in decline and that its production infrastructure desperately needs upgrading. This could indicate that Russia will go along with a production freeze out of physical necessity and as an excuse to cut production without admitting its infrastructure limitations.
Russia produced 10.91 million barrels of oil a day in March – its highest output in 30 years and only slightly more than it did in January. Just recently the Russian Energy Minister declared that Russian oil exports would grow in 2016, which is technically possible even with a freeze at January production levels. Russia could commit to the freeze and still produce record amounts of oil at the top of its capacity.
2. Will Iran’s refusal to participate scuttle the deal?
Iran is resolute in its commitment to accelerate its oil production back to pre-sanctions production levels and possibly beyond. For political reasons, President Rouhani’s government must remain committed to producing and exporting more oil, whether or not Iran’s decaying oil infrastructure can support these production increases.
No matter how much pressure Saudi Arabia—or any other country—puts on Iran at Doha, the government will not give in. This means Saudi Arabia, Russia, and the others must ultimately decide if they will go ahead with the deal regardless of Iran. Mohammad bin Salman, Saudi Arabia’s Deputy Crown Prince, indicated recently that his country would not. “If there is anyone [namely Iran] that decides to raise their production, then we will not reject any opportunity that knocks on our door,” he said.
On the other hand, Saudi Arabia has other ways of preventing Iran from bringing its oil to the market, such as blocking Iran from using SUMED (a pipeline from the Middle East to Europe). Saudi Arabia can also complicate Iranian maritime shipments of oil without formally blockading, because they regularly benefit from access to Saudi and Bahraini ports. Perhaps the Saudis believe that because of their own efforts or because of Iran’s dilapidated infrastructure, Iran will not be able to increase oil exports in a meaningful way so Iran’s participation in an agreement is essentially irrelevant.
Alternatively, perhaps the Saudis know a freeze agreement will prove meaningless when it comes to pricing but are using Doha as a way to shift the responsibility for sub-$40 oil from themselves to Iran. In either of those two situations, Saudi Arabia would be incentivized to agree to a deal.
3. Where do Libya, Iraq, and Venezuela stand?
Libya is also staunchly opposed to a production freeze, but since Qaddafi was overthrown, Libya’s government has been weak and unable to mandate the day-to-day production of oil. There is no central authority in Libya to limit (or increase) production at this time.
Even if Libya did agree to a production freeze, its word would be worthless because the government does not have effective control over the facilities. However, it is unlikely that Libya as a nation would be able to increase oil production in any meaningful way given the degree of devastation and instability the country faces.
Several months ago Iraq came out against a production freeze but recently changed its mind. On the other hand, Iraqi oil exports recently rose, again raising doubts about Iraq’s stance.
Venezuela is probably the most eager for any bump in prices that an oil freeze could provide. Despite its massive oil reserves (currently the world’s largest), the country is heading towards bankruptcy, and the government cannot afford to keep the lights on, let alone pump more oil. Since Venezuela cannot afford to pump more oil, it will advocate for any chance to raise the current oil prices at the current production rates, and a Doha deal might be their best hope for now.
4. What about the United States and Canada?
Neither the United States nor Canada can even consider participating in an oil production freeze agreement. Central authorities do not control the daily production of oil in these countries. Moreover, the individual companies are prohibited by law from colluding even if they wanted to.
Now that companies can export crude oil produced in the United States, there is nothing but logistics to stop these producers from filling any supply gaps that occur under the freeze agreement if they choose to do so. The countries meeting in Doha may be counting on the logistics to interfere, or they may think a speculative spike will happen even if North American oil producers fill gaps.
Under these circumstances, is an agreement to freeze oil production really worth anything? The market will continue to be oversupplied and any small gaps in supply can be filled by non-participating nations. If an oil production freeze agreement emerges from this Doha meeting, (which is not a guarantee) its value will likely be limited to a speculative jump. Those paying attention to the fundamentals, however, will realize that this agreement will not bind any producer to anything it did not already want to do
Reader Survey
Given the considerations listed above, is an oil production freeze agreement really worth anything? And if promises are made at the Doha meeting can any of the participants actually be trusted to comply for either the short or long-term? Please respond in the comments.