Mar 04 2012
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OPEC Shia-Sunni split?
Chatham House says OPEC may be heading for a Shia-Sunni split, but it appears to have discounted the group's enduring powers and its resilience despite wars and severe disputes between member states.
Social media and the Iranian state news channel reported that an explosion destroyed a pipeline in the restive eastern Saudi Arabia, near the Ras Tanura refinery but was denied by the Interior Ministry.
The oil-rich Eastern province is the heartland of Saudi Shias and has seen sporadic episodes of protests and unrest since the Arab uprising. The great fear among risk consultants is that Saudi Shias may stage some quite of large-scale demonstration in sympathy with their Bahraini brethren.
But Saudi forces have successfully quashed any hint of disturbance in the eastern province, just as they did when Bahrain's Shia citizens rose up against their regime.
While Saudi Arabia has accused Iran for meddling in Bahrain and the Eastern province, to-date the two countries have not let their political and religious differences come in the way of their common economic interests, ie. high oil prices.
Events are now more complicated as the international sanctions against Tehran start to weigh in on oil prices. Brent rose 10.5% in February alone and the false news of an explosion in Saudi merely highlighted how jittery market sentiment is at the moment.
Iran has warned Gulf states not to replace its oil supply with their own, but to date GCC has paid little attention. Oddly enough, ignoring quota has never been a deal breaker among OPEC members.
It's when prices go south that could stir trouble in OPEC ranks.
"A growing Sunni-Shia split within OPEC may threaten the management of the oil market in the event of downward pressure on prices if the global economy reverts to recession," wrote Paul Stevens, energy analyst at Chatham House.
The consultancy points to the OPEC meeting last year which Saudi Oil Minister Ali AlNaimi termed the "worst" he had ever attended.
"The recent intervention of Saudi Arabia in Bahrain has brought relations with Iran to an extremely low point. This is likely to last as the Arab uprisings deepen divisions between Sunni and Shi'a regimes in the region. It aggravates the already poor relationship between King Abdullah and Nouri Al Maliki's Shi'a government in Iraq," says Steven.
The June 8 OPEC meeting was at the height of the crisis in Bahrain, which led to severe tension between Saudi Arabia and Iran.
"This spilled over into the June OPEC meeting. Saudi Arabia had gone into the meeting publicly requesting a formal increase in OPEC output to counter the rising prices," wrote Stevens in a report. "The Iranians managed to create a coalition including Venezuela, the 'official' Libyan delegation, Algeria and several other members to block any attempt to formally increase OPEC output. The result was an extremely acrimonious meeting, which could not even agree on a final press release - previously an unheard-of event at any OPEC meeting."
HISTORY OF CONFLICT... AND PARTNERSHIP
Saudi Arabia and Iran have been at loggerheads within OPEC before and at times their relationship has determined the direction of oil market trends.
The oil price collapse of 1986 was reversed by Saudi Arabia and Iran working together, as was the 1998 collapse when Saudi King Abdullah in Abdulaziz Al Saud decided good relations with Iran were more important for Saudi interests than insisting on pursuing an OPEC policy of non-cooperation with that country.
But more often than not economic interests trump political differences. In December 14 OPEC met again and instead of the fireworks that most analysts were expecting, the Saudi and Iranians quickly agreed on maintaining OPEC output at 30 million bpd.
"Observers noted that the Iranian delegation seemed subdued. This is not so surprising, as in the past deep divisions have been put aside when both countries faced the prospect of much lower oil prices," says Steven.
Chatham House says that future OPEC meetings may well be similar to the acrimonious one in the summer of 2011.
"Whether this matters depends upon the prospects for the development of surplus capacity to produce crude oil in a significant number of OPEC members. The key to this will be what happens to capacity expansion plans, but above all in the near term what happens to oil demand.
"Another issue that would affect OPEC in the longer term is that, if members move towards a greater use of markets and the private sector under a 'democracy develops' scenario, enthusiasm for OPEC membership may dampen."
ENDURING QUALITIES OF OPEC
OPEC has surprised analysts with its enduring qualities. OPEC members have fought with each other (Iraq vs Iran), have invaded member countries (Iraq-Kuwait), often worked against each other and ignored quotas, but somehow the coalition has endured behind one common cause - keeping control of oil supplies and influencing prices.
While Iran and Saudi political relations are perhaps worse than at any time in their history, they retain a common interest: high oil prices.
Iran has higher production costs and needs high oil prices to keep revenues intact especially as it may only be able to export a small amount of its production at discounted prices.
"Meanwhile, as Saudi Arabia has become ever-more generous towards its own population in the light of uprisings elsewhere in the Middle East and North Africa, so it will be less willing to allow oil prices to fall too far: it needs permanently higher oil prices simply to allow its fiscal numbers to add up," says Stephen King, HSBC chief economist.
Will economic interests trump political interests this time around. And will Saudi Arabia and Iran make up just before another OPEC meeting, continuing to confound analysts and critics alike?
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