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Iraq, OPEC and the Strait of Hormuz closure
2012-02-12Dr Ibrahim Bahr Alolom
Today, OPEC faces one of the most significant challenges in its history, a challenge that ultimately may result in the collapse of the organization. And as OPEC’s president, Iraq is tasked with dealing with this situation. The situation? Iran’s threat to close the Strait of Hormuz. A scenario that will send economic and geo-political shudders across the world.
All eventualities are possible today at a time where tension envelopes the region, bearing in mind that this decision will have negative effects on both Iran and the region. However, as the Arab poet states “If death was a guarantee, then the country will not go down’’.
Some suggest that this is a pressure tactic played by Iran in response to the ban by the European Union on importing Iranian oil. Iraq, not only in its role as a founding member of OPEC but also as one of it’s key constituents, has a crucial role to play to potentially save the organization from collapse if Iran were to go ahead and implement its threats.
The core power of OPEC lies today in its ability to maintain a strong practical bond between the countries lying on the shores of the Gulf, and this is as a result of the reserves of these countries which form more than 60% of the world petroleum reserves, and the production of these same countries who provide approximately 40% of the worlds oil production, not to mention natural gas supplies.
Therefore the decision to close the Strait of Hormuz, which is a major supply artery of the Gulf’s countries, and the absence of any alternative export methods demonstrates that Iran has taken a one-sided decision to stop the economic supply line of seven countries in the Gulf, contrary to will of those countries.
This direction leads to a dangerous path in terms of the interests of the countries concerned and creates doubt on Iran’s intentions towards the organization, which was originally formed to preserve petroleum and gas interests of the member countries.
This decision may likely lead to fragmentation and will weaken the ability for the organization to continue in its role as an economic organization and questions its ability in being able to sustain the interests of its member countries.
This is not taking into consideration the chaos that will be caused in the balance of supply and demand in the international oil markets which will in turn result in a significant, and possibly calamitous increase in oil prices.
Hence, such a closure will not only affect the United States; rather this decision will affect emerging economic powers including China, Japan and India. Furthermore, the effects will not only hit the oil markets, rather it will severely affect all general trade internationally via this Strait.
Therefore we must not focus the discussion on whether the United States has the military capacity to prevent the closure, even for a short time, of the Strait. The key issues will be how the region will be affected economically as well as the future relationships between members of OPEC and especially between Iran and the Gulf states.
Will Iran still be a member of OPEC if it implemented its thread? Without doubt the presence of Iran in OPEC as a high producer and a core player is important however, this is linked to the extent of its keenness in the interests of other members of OPEC.
It is true that the region faced similar threats at the time of the Iraq - Iran war, however the situation was different than it is today; then both countries tried to affect each others export capabilities and the Strait was never closed at all during the war between the two sides which lasted eight years.
However, the reality in the region today is one of major risk and Iraq has a major opportunity ahead of it through its membership of OPEC to halt any risk that will affect its economy and the economies of the Gulf countries and it also has a major role to play in breaking up the conflicts between political and petroleum issues and to prevent Iran from playing the pressure card in the closure of the Strait of Hormuz as a step against the United States.
The Strait of Hormuz has a vital role to play in the exporting of oil for seven countries that are members of OPEC, from a total of eleven members. Therefore, exports from Saudi Arabia, Kuwait, Qatar, the UAE, Iran, and Oman (even though it is not a member of OPEC) may be affected – this represents more than 17 million barrels per day and this is asides exports of natural gas.
OPEC’s crisis
Iraq’s relatively good relationships with the interested parties and its role in OPEC puts it in a position to potentially solve the on-going crisis occurring in the region, but for this to take place requires Iraq to be active and to be able to sufficiently promote joint interests. One of these active routes Iraq can pursuit is through OPEC.
OPEC witnessed last year major disagreements between its member countries, and the organizations meetings, especially the one before last in June 2011 was the worst in the last sixteen years as described by the Saudi Oil minister, where the meeting was adjourned without any decisions being made and OPEC did not release a final and concluding statement for the first time in its history.
OPEC was divided into two camps: The Saudi and Gulf countries on the one hand and Iran, Venezuela and Algeria as well as other countries on the other. The disagreements remained on-going until the last meeting in December 2011, where they were able to release a concluding statement clarifying an agreement in setting an upper limit of production of 30 million barrels per day without going into details of the distribution quotas.
I believe that the political repercussions in the Arab world have started to strongly affect OPEC meetings resulting in the prevention of reaching joint views with regards to policies in setting a production ceiling for the member countries.
It has started to become clear that OPEC is becoming weakened and this will bring relief to some international entities that are afraid of the consistent presence of the organization as a strong economic power being able to control the production and prices in a competent manner.
The alleviation of disagreements between the two camps requires a third camp which can strike a balance, and Iraq has the ability to play this vital role in solving disagreements and to preserve the role of OPEC, as Iraq carries with it heavy weight in terms of its oil reserves and future production plans. This camp can also include the new Libya in addition to other members in the organization in forming a camp inside of OPEC that will stop the organization from its march to collapse.
This camp will balance the two other camps and will reinforce the independence of decisions as well as helping to ensure that decisions will be based on the interest of the organization and its member countries. We believe that Iraq as the president of the Organization is able to establish the foundation for this role of ‘balance’ in order to keep the organization a credible and core player in the international energy market.
The refusal to use oil as a weapon
From another point of view, OPEC as an organization needs to reject the policy of an oil ban upon any of its member countries for political reasons, on the basis that oil and gas are strategic commodities and a political ban will lead to detrimental effects on the interests of all, not only on the producing entity alone.
This is where it is important to consider differentiating between imposing a ban on, for example, the sale to Iran of spare parts for civilian aircrafts, or imposing a ban on American or European oil companies from co-operating with Iran and a ban on the importing of Iranian oil. The first option affects Iran, its citizens as well as its economy, however it will remain relatively contained. The latter however will affect a broad spectrum of entities.
Oil as a strategic commodity requires it not to be used as a political weapon; it was outwardly rejected and condemned by the west not long ago when the Arabs used oil as a weapon in 1972. OPEC tries constantly through its policies not to harm consumers and it is correct in maintaining policies to balance oil markets through finding an acceptable equilibrium for all.
There are exceptions to this principle. When a member state violates peace and security and there exists an international legitimacy to impose a ban, then OPEC and its members will become legally bound by such decisions, and a clear example of this is when Iraq invaded Kuwait in 1990 and it was placed under Chapter VII sanctions by the United Nations.
The road map
The region today is witnessing sharp and tense conflicts in both the oil and politics arenas, and without doubt there is a major need to solve this dangerous and painful situation, and Iraq; thanks to its strategic position and its relations both regionally and internationally and its leadership position in OPEC is able to manoeuvre positively in a number of ways:
The first course
To call for an extra-ordinary session for OPEC after a series of quick preliminary meetings to place Iran in front of its historic responsibilities to withdraw its military threats to close the Strait of Hormuz and to not affect the interests of the region.
The second course
To manoeuvre actively amongst the European Union and the United States and stressing the importance of not using oil as a political weapon and to untangle the interwoven nature of the oil and political spheres and to make the European Union countries understand that any ban on Iranian oil will not bring a response from other members in the organization to compensate. And also to work actively with international organizations concerned with energy issues such as the International Energy Agency to explain to them OPEC’s point of view in this crisis and to co-operate for the sake of ensuring the consistency in oil flow.
The third course
For Iraq to form its independent stance within the organization and to not be pulled by political forces, rather Iraq needs to focus on forming a ‘balancing factor’ between the two blocs and to take OPEC’s interests as its prime objective.
Conclusion
Iraq’s initiative within the Arab League in relation to Syria, even though it was relatively bare, was an important and positive contribution and today Iraq experiences another test in terms of its responsibilities as President of OPEC.
Iraq has ahead of it a historic opportunity to activate its strategic position and to leverage its petroleum and gas reserve and its future production plans separate energy issues with politics. Iraq should help reorient oil issues so that they provide consistent economic growth and not disturb the balance of supply and demand and to prevent members of the organization from threatening oil flows and simultaneously to refuse the use of energy issues as a political weapon.
Iraq was successful in hosting the establishment conference for OPEC during the 1960’s, will Baghdad be successful in preventing the collapse of this organization that for over five decades has protected the interests of both it’s member states as well as its consumers? This requires a strategic vision.
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