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Global Economics

Behind OPEC's November Meeting in Vienna

As the global economy cools precipitously, the oil producers are anxious to curb output to keep prices from falling further

Less than three weeks after an acrimonious Ramadan meeting in Vienna, OPEC has now called an emergency meeting for Nov. 18 in the Austrian capital. The reason is clear: The cartel is worried about the precipitous 40% fall in oil prices since they peaked at $147 per barrel in mid-July. The OPEC basket, a blend of OPEC crudes, dropped through the psychologically important $80-per-barrel level, to $77.38, on Oct. 9. OPEC countries typically receive less for their crude than the widely reported West Texas Intermediate (U.S.) crude, which is now trading at about $87 per barrel. "The organization is concerned about the deteriorating economic conditions with contagion risks," OPEC said in calling for the rushed confab.

The big question is whether OPEC can engineer a soft landing for prices now that the world economy is slowing quickly. That is far from a sure thing, and it will depend on cooperation between the main players: the Saudis and their Gulf allies, along with Iran and Venezuela. Falling prices could put more pressure on the ties that bind OPEC together—with price hawks such as Iran and Venezuela pushing for cuts, while the Gulf Arab producers led by the Saudis are wary of taking steps that might further sink the world economy. Countries such as Iran and Venezuela want to put a $100-per-barrel floor under prices (BusinessWeek, 9/25/08), but the Saudis consider that too high.

Iranian Resistance

The main flashpoint is likely to be between Saudi Arabia and Iran, the two most important countries in the Gulf. Despite his fiery rhetoric, Venezuela President Hugo Chávez has been a willing partner of the Saudis and is now preparing the Venezuelan people for lower prices and lower government spending. Working with Iran is much more difficult for Saudi Arabia. The Saudis figure that the Iranian regime would be badly damaged by lower oil prices, and they may be tempted to teach the nettlesome President Mahmoud Ahmadinejad a lesson.

At the last meeting the Saudis, despite thinking the market was well balanced, went along with a statement saying the oil club would adhere to a complex quota formula, which the organization's temporary president, Chekib Khelil, interpreted as a 520,000-barrel-per-day cut, annoying the Saudis, who didn't want a number mentioned. Saudi Arabian officials said after the meeting that they would continue to supply their customers' needs. The assumption is that, because the Saudis are producing perhaps 700,000 barrels per day above their 8.9 million-barrel daily quota, most of the cuts would come from them. So far there seems to have been only modest reduction of output.

David Kirsch, an analyst at PFC Energy, a Washington consultant firm, thinks that with demand falling, OPEC is entering a phase of much more active management of the oil markets, including more frequent meetings. He says it's uncertain at this point whether there will be a production cut announced at the November emergency meeting, but with demand dropping off, OPEC "will not want to wait too long to cut, and they would probably rather meet and decide action isn't necessary than wait too long to do something."

Reed is London bureau chief for BusinessWeek.

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