Even if a deal between OPEC members is reached, increased supply from Iraq and Iran threatens Saudi Arabia’s control over the group. Iran and Iraq both asked for exemptions from any cuts in the deal citing a need to recover from sanctions and a need to fight the Islamic State respectively.
Iraq and Iran have raised oil output to record highs. Together they produce more than 8 million barrels of oil a day, almost a quarter of the oil pumped by the group and nearly as much as Saudi Arabia, the group’s largest producer.
The decision of whether or not to allow the exemptions was ultimately delayed to the meeting on Nov. 30, where OPEC ministers will work out a shared cut in production aimed at reversing a price slide that has devastated the budgets of oil-dependent nations like those in OPEC. Benchmark Brent crude fell from more than $115 a barrel in mid-2014 to less than $30 before rebounding to a still low $45-$50 range.
Both Iran and Iraq would benefit from the higher prices, but they benefit more if they were able to sell more oil while others cut back. While a special exemption might be necessary to make the deal work, it would leave Saudi Arabia to shoulder most of a collective decrease and sacrifice its market share for the sake of its two biggest OPEC competitors.
If there’s no agreement to restrict output, the International Energy Agency has said that oil prices are likely to fall in 2017. OPEC’s own estimates of supply and demand also show that even following through on the agreement would barely drain a record oil surplus without the cooperation of non-members like Russia.
No non-OPEC nations are likely to make substantial cuts to their output. Russia is producing at a post-Soviet era high and has repeatedly said it “prefers” a freeze to a cut. And participation from other major producers like the U.S. or Canada has never been realistic. The U.S., the only oil producer on par with Russia and Saudi Arabia for total output, in particular could cause trouble for the deal. It was the massive increase in U.S. shale oil production combined with lackluster global demand for oil that caused the glut in the first place. Should oil prices rise as intended, revitalized shale driller output will likely put a ceiling on how high they can actually go.