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OPEC Is Facing a Critical Test As Mideast Unrest Deepens

Monday, 6 Jun 2011 | 1:39 PM ET

With oil-producing countries in turmoil and crude gushing to triple-digit prices, the Organization of Petroleum Exporting Countries finds itself, at 50 years old, at a critical crossroads.

AP

OPEC, which meets Wednesday in Vienna, produces 40 percent of the world’s oil, but unrest and revolution in member countries have compromised output.

John Kilduff, an energy analyst and partner at Again Capital, said the activity in the Middle East and North Africa is "unprecedented and it’s a tremendous threat to oil production country by country.”

That threat is most notable in Libya where revolutionary forces are challenging the stranglehold of military dictator Muammar Gaddafi. It’s that struggle that closed the tap on the country’s 1.3 million barrels of production and helped push up the price of oil around the world.

Meanwhile, OPEC’s second-largest producer, Iran, threw another curveball at world markets when President Mahmoud Ahmadinejad fired his country's oil minister, who had been the current president of OPEC, and took control of the ministry and, by extension, OPEC. (Under pressure, Ahmadinejad named a caretaker chief of the oil ministry.)

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“To a degree the change in Iran’s oil ministry is internal politics,” Kilduff told CNBC. “But I do think it’s a move by the president and the Iranians and the hawkish members of OPEC to get behind a regime that gets oil prices higher, not lower" by restraining production.

This only heightens tensions between the mainly Shiite Muslim Iran and OPEC’s largest producer and de facto controller Saudi Arabia. That relationship is already deeply strained after the Saudis sent troops into Bahrain to help repress mainly Shiite demonstrators.

Many of OPEC's 12 members are under siege by unrest at home and in neighboring countries.

According to Kilduff, “So much of OPEC production is hanging in the balance here as this freedom wave rips through the region. It is really what is generating a big, big insecurity premium in oil prices right now.”

While OPEC tries to hold itself together, Kilduff said it is struggling to reshape its identity after 50 years, adding, “I think they are struggling with wanting to keep prices elevated but not kill the golden goose at the same time.”

—Justin Solomon contributed to this report.

Look for reports from Melissa Francis from the OPEC meeting in Vienna this week on CNBC.


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