THE BLOG
05/23/2011 07:14 am ET Updated Jul 23, 2011

Trouble Ahead! Iran and Saudi Arabia the "Oil" Brothers

Trouble ahead! The oil consumer's nightmare is beginning to unfold. The news was blazoned in the New York Times. Iran's President Mahmoud Ahmadinejad, locked in a power struggle with conservative rivals at home, declared himself 'oil minister'. This, at a time when Iran holds the rotating presidency of OPEC. Thus Ahmadinejad will arrive in Vienna for the June 8th OPEC assembly vested in the mantle of OPEC's president "setting the stage for a highly politicized gathering of the cartel," as the Financial Times put it.

All this at the very moment that the International Energy Agency (IEA) is warning oil producing countries (read: OPEC) to increase output to safeguard the fragile global economic recovery. Astoundingly, the IEA has coupled its solemn entreaties stating there was a "clear and urgent need for additional supplies" with the threat to draw on the 1.6 billion barrels of strategic reserves held by member governments -- President Obama, are you listening?

Mr. Ahmadinejad's priority will be in sharp variance with that of the IEA. He will be pressing for higher prices to shore up his country's struggling economy and to consolidate his position at home.

Misguidedly, the IEA and the United States will be looking to Saudi Arabia to take the lead in countering or at least moderating Ahmadinejad's objectives for ever higher oil prices, thereby once again depending on OPEC's largest producer whose duplicity is ignored or rationalized away again and again. Only recently, in response to the oil supply disruptions in Libya, Saudi Oil Minister Ali al-Naimi in an ephemeral moment of statesmanship as much as assured world's oil markets that Saudi Arabia stood ready to make up the Libyan shortfall approaching 1.5 million barrels/day with Saudi Arabia's spare production capacity of 4.5 million barrels/day. But then barely a month later we learned that the Saudi announcement, as is the case with so much of their pronouncements, was a mere mirage. On March 5th the Saudis announced increases in prices for deliveries of oil to their European and Asian customers.

The latest IEA report on oil markets shows that OPEC's total production in April was 1.3 million b/d below the level recorded before the Libyan crisis. Hello, Saudi Arabia!?

It can be assumed that as far as prices are concerned Iran and Saudi Arabia are brothers in oil. The difference at this OPEC meeting is that Ahmadinejad will stump and shout for higher prices, and while surreptitiously cheering him on, the Saudis will wring their hands, shake their heads convincing our press and too many of our government officials that they are helpless to rein in that loose cannon Ahmadinejad. That they really wanted a policy of 'lower prices' but they were so helpless in the face of Ahmadinejad's bombast.

When all is said and done at the Vienna meeting, there you will find Ahmadinejad at his favorite Viennese Konditorei munching an apfelstrudel and raising a cup of schokolade mit schlag toasting those bygone glory days of the Anschluss.