December 14, 2018 | CNN

OPEC’s reputation in D.C. is hurting. Qatar’s exit will make it worse.

December 14, 2018 | CNN

OPEC’s reputation in D.C. is hurting. Qatar’s exit will make it worse.

Qatar recently announced that it will leave OPEC next year, withdrawing after 57 years of membership. The surprise move reveals the deep fissures within OPEC as the cartel’s decision-making power coalesces around Saudi Arabia and non-member Russia. With the bloc striking a bigger-than-expected production cut for 2019, Qataxit (or Opexit, if you prefer) is likely to create increased oil market volatility while feeding anti-OPEC invective in Washington.

Though its withdrawal will be largely symbolic given Qatar’s status as a minority oil producer — its heft lies in natural gas — it is a jab against its regional rival, OPEC kingpin Saudi Arabia, which enacted a boycott against Qatar in June 2017 over allegations that Doha supported terrorism. The decision also sheds light on OPEC members’ growing feelings of exclusion by the Saudi-Russian axis.

In December 2016, Russia and Saudi Arabia, two of the world’s largest oil exporters, teamed up to deliver the OPEC+ cut agreement, which took roughly 1.8 million barrels per day off the market in an attempt to shore up a steep slide in oil prices. The deal marked the first time in 15 years that OPEC and non-OPEC countries had cooperated.

While Qatar’s official reason for exiting is so it can focus more on its natural gas ambitions, its energy minister griped that oil is “controlled by an organization managed by a country,” a barely-veiled reference to Saudi Arabia. Riyadh’s power within OPEC has substantially grown, in large part because it is the only member with significant spare capacity. And though Moscow is not an official member of OPEC, its subsequent cooperation with Riyadh has set OPEC’s policy since the 2016 deal was struck, with the Saudis appearing keen to transform this relationship into a more long-term arrangement.

Other members’ interests haven’t always aligned with those of the Saudi-Russian axis, fomenting strife in OPEC. Iraq, while agreeing to extend OPEC+ cuts into 2018, noted that it was doing so at personal cost, given the country’s dire fiscal straits. Other OPEC members, including Venezuela, Kuwait, Nigeria and Algeria, reportedly say they feel marginalized by Saudi-Russian dominance. While OPEC members cheered that same cooperation in 2016, now they are reportedly privately noting “rising discontent” over Riyadh’s and Moscow’s hold over the bloc’s decision-making. Qatar, which pumps just 600,000 barrels per day, isn’t a big enough producer to feel sidelined by the Saudi-Russian axis — which is itself beset by divergences, casting doubt on how long this newfound cooperation can hold.

Against this backdrop, Qatar’s exit suggests that OPEC may see increased instability. At minimum, it might embolden other producers to vent their frustrations against Saudi-Russian dominance. It signals OPEC’s lack of unity, even within the Saudi-Russian axis, which could spur greater volatility in oil markets. But more worryingly for OPEC, it might signal its impending irrelevance. This is not to suggest the cartel’s imminent demise, but OPEC has lost tremendous market power compared to its heyday, as US shale productionmuscles up. Growing US output, coupled with increasing internal dissonance, risks downgrading OPEC’s decision-making power over markets long term — which could give members cause to re-think their involvement in the bloc. The Saudis, on some level, seem aware of the organization’s dim prospects, given reports that a government-funded think tank has commissioned a study on breaking up OPEC.

All this compounds OPEC’s sinking reputation in Washington, fueled by perceptions that its actions have raised costs on American consumers. The Department of Justice began formally reviewing antitrust legislation against OPEC last month. Dubbed “NOPEC,” the measure would make it illegal to set oil prices or curb its production, remove the sovereign immunity that has safeguarded OPEC members from US legal action, and enable the attorney general to sue the cartel for price fixing. President Trump recently doubled down on his demands that OPEC keep prices low, while the ceasefire in the US-China trade war, if it holds, could mitigate previous fears of an economic downturn and boost oil demand forecasts.

Saudi Crown Prince Mohammed bin Salman cannot afford to alienate President Trump, who is perhaps his best and only western defender given the diminished position he finds himself in following the killing of Saudi critic Jamal Khashoggi. But neither can the young royal afford to distance himself from Russian President Vladimir Putin. Though the two agreed on the need for a production cut, OPEC’s Vienna talks were greatly complicated over the precise volumes and on how the burden will be shared by both producers. Moreover, the two disagree on a range of other important global issues, including the role of Iran in the Middle East.

Qatar’s exit, in exposing OPEC’s internal struggles, is likely to feed Washington’s anti-OPEC sentiment. And given the cartel’s numerous internal fissures, more mixed messaging and volatility is likely in the future, which in turn could hamper President Trump’s efforts to keep a cap on oil prices. Other countries, seeking to minimize reputational taint with an increasingly toxic brand, may be tempted to follow Qatar’s example. For OPEC, Qatexit may foretell a winter of discontent.

Varsha Koduvayur is a senior research analyst at the Foundation for Defense of Democracies, where she focuses on the Gulf. The opinions expressed in this commentary are her own.

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Gulf States