Imagine, if you will, a fantasy world free from the meddling of anti-trust agencies. The titans of the smartphone world — Apple and Samsung — meet in a Silicon Valley board room to strike a historic price-fixing deal amid a cycle of depressed smartphone prices.
Tim Cook and Lee Kun-Hee agree to freeze the production of smartphones, starving the market and sending the global smartphone price sky high. The two men have a high-profile personal spat and a fierce battle raging in the courtroom over a disputed patent, but after all "business is business."
The fanciful nature of the Apple-Samsung cartel imagined above points to the stark difference between how global oil markets have historically operated compared to markets such as consumer electronics. But even in the uniquely structured oil business, are the days of an OPEC-led cartelized oil market over?
Earlier this week, Saudi Arabia and Russian representatives struck a deal in Doha to freeze oil production, apparently in a bid to raise global oil prices. This was sparked by the price dipping below the psychological barrier of $30 per barrel that many producers assumed they would never see again. This apparent detente between Saudi Arabia and Russia, two countries on opposite sides of a proxy war being fought in Syria, came as a surprise to many.
The Saudi-Russian deal made little immediate impact on global oil prices, which enjoyed only a short rally to over $35 per barrel but soon settled back a few dollars lower. Some observers rushed to dismiss the deal as "useless political baloney." Others, more hopefully, saw this as a signal of realignment of policies on Syria, provoked by a humanitarian crisis that becomes more severe by the day.
Still others understood the deal as essentially a tactical move by two strategic enemies, united by the pain of successive falls in global oil prices that are beginning to threaten their domestic economic models. After all, "business is business" — why not just set aside the awkward question of Syria? Putin spokesperson Dmitriy Peskov made clear to the press that "these are separate issues."
Whichever of the above is true, this move may be more significant as the first real test of OPEC's power as ultimate arbiter of global markets. There was a time when OPEC was so powerful that with one command it could cause gas station lines and sow panic across the U.S. This time around, the best that Russia and Saudi Arabia could manage was a contingent deal that leaves out key players.
Qatar and Venezuela have promised to go along with the output freeze (bankrupt Venezuela has been furiously lobbying for such measures over recent months). Kuwait and the UAE have also offered tentative support, and Iraq so far is sitting on the fence.
However, Iran is the major sticking point. Iranian oil minister Bijan Zanganeh was quick to affirm that Iran "will not forgo its share of the oil market," a share it has long been waiting to reclaim and one that is finally within reach now that international sanctions have been suspended.
The legitimacy of the Iranian government, which has promised a hopeful and exhausted populace that it will ramp up production by 500,000 barrels per day immediately, depends on regaining that market share. Moreover, Iran sees little incentive to show solidarity with a coalition headed by Saudi Arabia, a country that showed little such solidarity when it allied with the U.S. when sanctions were first imposed on Iran, and with whom relations are once again at a historic low.
There is no doubt this is a changed landscape. Wavering compliance with quotas among OPEC members is nothing new. However, consensus on basic goals among OPEC members is becoming increasingly hard to achieve. Divergent geopolitical priorities and conflicting interests among members (let alone non-OPEC observers like Russia) frequently frustrates progress.
The U.S. plays no small part in shaping this landscape. The key incongruency with the hypothetical smartphone market I described above is that in reality, even in the absence of anti-trust authorities, any Apple-Samsung pact would quickly be thwarted by Chinese manufacturers like Huwaei and Lenovo filling the gap in the market with competitive products. In the oil market, emerging producers like the U.S. shale companies will perform the role of market-balancer by responding to any rise in prices by ramping up their drilling programs.
Since oil prices first began their descent in 2014, Saudi Arabia surprised the world by breaking from its traditional strategy of stepping in to cut output, and patiently waited until the contours of the new market dynamics became clear. Negotiations over the potential freeze are still ongoing, and it is not yet clear how many of the key oil producers Saudi Arabia can rally to prop up the market.
However, the fragmented nature of the deal made this week may turn out to be a sign of OPEC weakness rather than strength, and may unveil global oil markets for what they have become. Global leadership is in flux, and in the meantime ad-hoc deals such as this one may be the best that the former titans can hope for.
