The Doha Oil Freeze Talks (Not)

A couple of days ago, the eyes of the world were turned to the city of Doha in Qatar, where the majority of oil producer countries met, allegedly to reach an agreement on freezing production in order to boost oil prices.

It didn't go well.

Saudi Arabia's Oil Minister Ali al-Naimi was strong to call out the freeze agreement 

Two days before the meeting day, Iran announced they would not attend the meeting (despite being invited in advance). This supposedly triggered a Saudi Arabia boycott on the agreement that had been pre-arranged between Russia, Qatar, Venezuela and themselves, and was to subsequently include the rest of the OPEC countries. I can only begin to imagine what it must felt for the remaining countries to take a flight to Qatar and go back home empty handed haven't achieved anything.

Oil prices followed suit on the monumental failure of the Doha meeting, and fell below $40 per barrel once again. This hurts the Saudis, but it hurts the other countries even more.

The oil pipeline has taken a huge hit these past months

Without taking any sides, I like how Saudi Arabia imposes as necessary condition to agree on the freeze, that all countries must join the pact. It pretty much emphasizes the nature of OPEC and what it is meant for: to be and act as a cartel. Let's remember that OPEC was founded to be and act as a cartel, after the United States had been dominating (and sort of imposing) oil prices throughout the 20th Century. After the creation of OPEC, it was now up to them to dominate oil prices from tne 1970s to our present time. But things may now be behaving differently, and perhaps, yes perhaps, we may see (or we already seeing) the US controlling oil prices again. And... the failure of this meeting can be labeled as monumental, considering the agreement was including non-OPEC countries. That's why Saudis were aiming for the "All-In" scenario.

Prince Alwaleed bin Talal

This article in which Maria Bartiromo interviews Saudi billionaire businessman Prince Alwaleed bin Talal, gives the best insight I have read so far regarding the aspiration of seeing a $100-a-barrel oil ever again. It shows why Saudis are the best at what they do (that is, the oil business of course), and their vision regarding crucial elements of the oil market, including the four key pillars of any business: sales & marketing, operations, human capital and finance. In other words, this is a top executive management Master's class. How will the output of my decision affect each of my key pillars?

The Saudis are smart: they have learned valuable lessons from past mistakes (from themselves and other nations) and they are adamant to any decision that may result in them repeating the same mistake. Their argument is quite simple, as it results from a combination of those four key pillars. They don't want to lose market share. As long as they maintain their market share in the industry, they have a privileged position, so why give it away? Doing so would be like Apple agreeing with all cellphone manufacturers to freeze production of smartphones, hence freezing the production of iPhones, but not including Samsung in the deal. It's basically the same thing than digging your own grave. Saudis 1, Rest of the World 0.

Keep in mind Saudi Arabia is the top oil producer in the world, pumping over 12 million BPD. Only Russia and the US at 11 million BPD and 9 million BPD, can come close to their figures... but hey... it's Russia and the US we're talking about. All the other countries don't even make it past 5 million BPD, so to them have Saudi Arabia and Russia freeze production is a huge helpout. Do you want another key factor? Saudi Arabia has the one of the lowest barrel production costs of all countries. While it costs $11 in Russia and $16 in the US, the Saudis' produce at a cost of $8 per barrel. All the other countries costs vary between ($10 and $25). Saudis 2, Rest of the World 0.

Way better than $4 per gallon...

What about the US? At this point I think they could't care less whether if OPEC countries freeze production or not. Of course, income is affected and revenue is nowhere near two years ago, but keep in mind that the US government doesn't own any oil companies. Meaning it's not THAT big a deal for the American economy, compared to say Iran, Russia, Qatar, Venezuela and the other countries whose primary source of income is oil, and on top of that, having the fact that most oil companies are state owned in those countries. Why do you think Saudi Aranco is going public? Saudis 3, Rest of the World 0.

Game, set and match, Saudi Arabia.

I'm telling you, those Saudis know their thing.

In conclussion, dealing with business is no easy task, but it pays huge dividends to know your terrain, know who you're sitting with, know you you're sitting against, know the implications of your decisions and have a past-history of results that can back you up. A hunch can go a long way in a Las Vegas Casino, but in the business world, we are talking about costs, revenue and income. Sitting down on a table hoping for the best with no previous preparation of the meeting you will be attending, can send you on a terrible path of failure. Being well documented, can put you on the path to success.

The funniest thing is that after not attending the meeting, Iran sends a cable recommending all the other countries to go ahead with the freeze output as it was planned.

H