Opec yesterday stunned the markets by refusing to make an expected reduction in oil output until producers outside the cartel also make significant cuts.
Anger was directed particularly at Russia, the second biggest oil producer, which had offered only to make a token cut. Opec was expected to agree a reduction of 6.5 per cent or 1.5 million barrels a day. But in the organisation's meeting it emerged that this was dependent on a 500,000 barrels-a-day production cut from non-Opec countries. Co-operation from the three most important non-Opec players, Russia, Norway and Mexico, was not forthcoming.
The impasse saw crude oil prices plunge 9 per cent in London to below $19 a barrel – within five cents of a two-year low – as the spectre of a looming price war was raised. Analysts predicted that oil could soon drop to $15 a barrel or even $10 a barrel by the end of 2002, a level last seen in 1998. Over the last year, oil prices have already fallen by more than 40 per cent.
Lawrence Eagles, of the brokerage GNI, said: "This was probably the toughest Opec meeting for years. The market expected a smooth 1.5 million cut, so this has come as a complete shock."
The plan for a co-ordinated Opec and non-Opec move was masterminded by Saudi Arabia, whose oil minister Ali al-Naimi said: "They [Russia] have the biggest capability. They are the key to price stability." Saudi Arabia is under severe economic and political pressure to see that the oil price stays well above $20 a barrel to ensure that the costs of the kingdom's debt and extensive social welfare system can be met. For the major oil consuming countries, energy price falls this winter could help ease the West out of the current economic downturn.
Julian Lee, senior analyst at London's Centre for Global Energy Studies, said it was the first time that Opec had really thrown down the gauntlet to producers outside the organisation. He added: "This does have a destabilising impact on Saudi Arabia. Because of the huge dependence of Opec countries on oil, the danger is that they will be hurt first."
Opec has grown increasingly frustrated at seeing countries outside the group simply use its production cuts as an opportunity to grab market share. Russia has been aggressively raising output for the last two years. Delegates at the Opec meeting in Vienna said the proposed 1.5 million barrels a day cut would be deferred until January, pending a better response from Russia and other non-aligned producers to its call for help in restoring prices to its target range of $22-$28 a barrel.Reuse content