Friday, December 9, 2011

The old game between Saudi's and Iran's oil interests continues

Reading the book The Oil Kings: How the US, Iran, and Saudi Arabia Changed the Balance of Power in the Middle East by Andrew Scott Cooper it is obvious there is a strong rivalry between Saudi Arabia and Iran to determine who will be the driver of OPEC and the lead regional power. This rivalry is being played out once again in current oil price dynamics.

Saudi Arabia has increased their production, the most in 30 years, to offset any disruption from the Arab Spring as well as any embargo on the Iranians by the EU. Saudi production is above 10 million barrels a day with latest reporting showing a 1.3 million barrel increase form earlier in the year.

OPEC is having their meetings on December 14th and it is unlikely that they will agree on production quotas. Saudi's increased production over the objections of Iran and five other members in June to offset the shortfall in Libyan production. OPEC Production is close to 3 million barrels per day higher than the total target. Everyone in OPEC is a cheater realtive to their targets.

If there is an EU boycott from OPEC's second largest producer there will still have to be purchases made from other countries. The EU accounts for 18 percent of Iranian exports with Asian accounting for the bulk of the Iranian oil sold. Of course, more oil will go to Asia, but the adjustment process can have an impact on prices in the short-run. By producing more the Saudi's do not allow any disruption in oil to convert into greater Iranian revenues which can be used to enhance its regional power. A key policy objective for the Saudi' is to use oil policy to maintain political pressure on Iran. Nevertheless, the impact of an EU boycott is very dangerous to oil markets and will increase the risk premium in these markets.

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