An OPEC Output Cut Not Likely to Alter Oil Imbalance

The key point of that article was the issue of the “marginal supplier.” Since shale oil and other non-OPEC oil now supplies the marginal demand (the demand for the next additional barrel of oil needed) what OPEC does is largely irrelevant.

It is also inevitable that OPEC cannot really enforce any conceivable agreement. During the fall of 1973 the world was different. Oil production and refining were both operating at or over rated capacities. With prices being restrained by price controls in the U.S. demand was stimulated. How do we know that price controls were holding down the price at that point; there were, pre-embargo, spot shortages of gasoline and heating oil. Many pumps were priced at $0.411 per gallon rather than to the “.9” price, or $0.409. Thus, a very small production cut by OPEC unleashed chaos.

Not so now; it would take an unimaginably large cut to have even a slight impact on prices, much less supplies.

It’s kind of hard to discuss an article on the far side of a paywall…

I just PM’d it to you in two installments. Please le me know if the copyright policies o f this site let me post it and I’ll be happy to post entire article. I will PM the article to anyone so interested.

No one is making you discuss it, but if you’d like to, WSJ articles have been available via your favorite search engine since forever. Just type the title in.

You probably shouldn’t post it, but I asked a moderator to weigh in.

You should not post it. At the SDMB we take copyright very seriously. You are free to quote short passages for purposes of illustration and link to the wider article off-board. Otherwise, please respect other’s copyright.

That was my instinct. To my mind, and correct me if I’m wrong, PM’ing is the equivalent of sticking the article in a copy machine and faxing or emailing it. Posting is a publication.

To put this 700,000 barrels into context, OPEC currently produces 32 million barrels per day, and about 40 when you count other liquids. Out of a global rate of about 96 million barrels per day.

That’s of course assuming the cut really happens. About as likely as the Toronto Mapleleafs winning the Stanley Cup, the Chicago Black Sox being resurrected or the passenger pigeon returning to the skies.

Not that one… I tried looking for it, thinking that maybe it had been reposted somewhere else for free, but no luck. My guess is because it’s only a bit more than a week old.

Anyway, what the article says in essence is that there are a lot of smaller players, and they’re the ones who drive the price of crude oil, not OPEC. In particular, there are more marginal producers who are able to step up when the market begins to get tight and continue to supply, rather than have supply remain static and have prices fly through the roof, as happened in the 1970s.

In other words, as prices rise, there are oil reserves that become profitable and ease supply constraints. As prices fall, these fall out of the picture. US tight shale oil is a good example of this. These are what determine the upper end of oil prices- OPEC can cut back, but short of cutting off their supply, the demand gets made up from the marginal producers as prices start to rise, damping any big price changes.

The problem with reports like this is that they lack any context. What’s “low” prices and what’s “high” prices?

If these guys are saying that cutting 700K barrels is not going to push prices to $100 per barrel in the near future, which is what I suspect they mean, then that’s certainly correct. But if they’re saying that 700K will have zero impact - that prices would be the same if they cut 700K barrels as if they don’t, then that’s certainly not true.

And one thing to appreciate is that prices at any given time reflect not just the current supply/demand situation but anticipations of future supply/demand dynamics. So if traders who previously thought OPEC was going to keep supply up and prices low until they drive the US producers out of business now see that OPEC is beginning to reign in that approach, that would have an impact itself. Which is why prices are now about $10 a barrel higher than they were only recently and almost double the lows of earlier this year.

One backdrop to all this is that there’s a natural decline rate to all oil fields, and with prices what they are there’s been a very big dropoff of new investment. This does not immediately impact the supply, but over time the impact increases. It’s very possible that 5-10 years down the line this will produce a rebound which could push prices back to all-time highs. This is what people who talk about “stabilizing the market” are referring to - you need a price which would encourage enough new investment to keep supply growing with demand, but not high enough to produce enough supply to outstrip it.