Yesterday’s OPEC meeting ended without an agreement to withdraw output from the market in an attempt to halt the recent sharp crude oil price decline. This should have come as no surprise …but it did, at least in the sense that oil prices–and oil-related stock quotes–fell further on the announcement.
In its earliest days, OPEC was badly understood by large oil-consuming countries. It had greater solidarity than the garden-variety economic cartel because it was at heart a political–not an economic–entity. It’s main goal was to end exploitation of producing countries by the big international oils, which made gigantic profits while paying the producers a pittance for their crude.
But even in those heady days for OPEC, there were significant divisions within the group. Members who had small reserves and pressing government fiscal problems wanted the highest possible current prices. In contrast, others, like Saudi Arabia, with long-lived reserves and better government finances, wanted to keep prices low so consumers wouldn’t start to seek out petroleum substitutes. Often the result of these divisions was leaky agreements violated by smaller countries and made to work chiefly through greater-than-promised cutbacks by Saudi Arabia.
Today, there are many more non-OPEC oil producers, like Russia, Brazil or the US. It’s also a generation since OPEC broke the dominating power of the big oils–plenty of time for institutional memory of past oppression to fade. In addition, Saudi Arabia must know that the burden of enforcing any agreement would fall disproportionately on it.
Letting prices fall to the point where high-cost producers are forced out of the market is the only way any commodity prices stabilize, in my view. In the case of oil, as far as I can see we’re nowhere near that point.
What I find odd is the negative commodities and stock market reaction.
(By the way, duinr the oil shocks of the 1970s, the US was the only developed country to fail to increase taxes on oil in order to discourage profligate consumption. We chose instead to continue to protect a dysfunctional auto manufacturing industry. If I’m correct about lower prices, we’ll have a chance to correct that error Let’s hope we take it.)