OPEC Making the best of a low price What is the oil cartel up to? AN EFFECTIVE cartel requires three things: discipline, a dominant market position and barriers to entry. The Organisation of the Petroleum Exporting Countries lacks all three. Its members cheat on their quotas. It supplies only 30% of the world’s oil—too little to exercise control. New producers abound. That is the backdrop to OPEC’s decision last month to make no attempt to bolster the oil price, sending it below $70 a barrel—a near 40% drop since June. Saudi Arabia, its most influential member, could have sent the price up single-handedly by deciding to pump less. Unlike cash-strapped oil exporters such as Venezuela, the kingdom can afford self- denial: it has savings of $900 billion. But Saudi Arabia can also weather a low price: its production costs are $5-$6 a barrel—the lowest in the world. Moreover, history suggests most of the gains from any cut in its output would go to other producers, who would sell their oil for more while increasing their market share. Saudi Arabia did try the tactic in the early 1980s, cutting its output by three-quarters from 10m b/d in 1980 to under 2.5m in 1985-6. The result was higher prices, but also a boom in investment, and then production, in places such as Britain and Norway. Trying to save OPEC with such tactics could be even more dangerous now. Keeping the price up would be good news for frackers, speeding the spread of that technology from America to other countries. Costly oil spurs thrift too, hastening the shift away from oil in transport. Every hybrid or electric car spells lost business for oil producers. Why encourage them? Cheap oil also has its consolations. Russia and Iran, two countries with which Saudi Arabia has its differences, are suffering much more. Better still, if low prices stem investment in other sources of oil, such as Canada’s tar sands or America’s shale, that means more demand for low-cost Saudi oil in future.
Posted on: Sat, 13 Dec 2014 08:25:46 +0000
Trending Topics
Recently Viewed Topics
© 2015