Wait…are you claiming that OPEC doesn’t engage in price fixing? That is their entire reason for existence, heck it is even in their mission statement.
The Saudis are on record saying that they do not want to cut production to protect market share, and OPEC is on record that they will not meet for 3 months even if prices drop below $20. Now this may be a cover because they have lost the power to control global prices but the fact that they have done so in the past and intend to in the future is established fact and not speculation.
My theory: business that are being helped by low oil prices are not lowering their prices – they’re gouging as much extra profit as they can and maybe passing it along to their shareholders, but not to their employees.
Sure, in the past, they’ve attempted (mostly unsuccessfully) to price fix. It does also seem to be the entire point of their existence as a cartel. Having said that, they’re not acting like a cartel now. They don’t really act in a coordinated manner. They’re pretty much a pointless organization. Hell, they even let Indonesia back in this year, and they’re a net importer of crude oil. What point is there in having an importer of crude in an oil cartel? The only country that matters in OPEC is Saudi Arabia. When a single member can veto any action and there is no method of enforcement and they all have diverging situations it makes for a pretty ineffective cartel.
It is also established fact that when they have attempted to do so in the past they were largely ineffective, and that they cheated on their self imposed quotas. Even now they have a combined quota of 30 mmbbl/d and are producing almost 2 mmbbl/d above that. Saudi Arabia is also on record as saying they will let market forces correct the imbalance; does that sound like the stance that a cartel would take?
One result is that we see just how much oil there is to pump in the world. The Saudis are going far out of their way ($100+ billion in reserves so far) to keep this ‘expensive’ oil off the market. They would rather deplete their own fields faster than allow that.
The Saudis aren’t the only factor- this looks like an economic feedback loop to me, where [1] the lower prices go, the more producers want to pump to keep revenues up, and the lower prices go, [goto 1]
Still, the overall picture means the majors are cutting their CAPEX, which will lead to a decline in production eventually (at least from them). There is the inelastic demand bit- global oil production only outstrips demand by about 2 million bbd, or less than 3% of global production. It isn’t nuts to think that economic forces will cut output by 3% after a decade of ~$100 oil.
After that, blammo! The oil price will probably spike, there will be frenzied activity for awhile, not a well-ordered market at all.
Why isn’t the economy booming? If your gasoline bill was $30 per month, and now it is $20 per month, how big a difference is that really? It would be better if the bottom half of earners made $100 more per week. But, unless you can somehow cut corporate profit-taking (good luck), they will have to work more for it, and where are they going to sell all those extra goods and services, especially in a time of general decline, especially in China? India?
When I get a chance I’ll look at this again. I see more of a leading relationship between GDP and prices. Plus, GDP does recover - is the 18 month lag time related to that?
Just saying that we have had a major decrease in prices due to the global decrease. The refinery issue has an impact sure - but we have had refinery issues when the prices were high also, so I’m comparing against that. These things happen at least once a year here. As I said it has led to a 10 - 15 cent increase in prices, but the prices are still $1.50 off their peak.
What do you think the goal of a cartel should be? You would think it would be to ensure the highest stable price that the market can support. You would think it would be the avoidance of this extreme volatility.
Their actions in the 1970s caused prices to rise too high setting the stage for a glut in the 1980s that they couldn’t overcome. The high prices of the 1970s directly resulted in increased energy conservation efforts, the development of alternative sources of energy, and the development of major non-OPEC sources of oil production such as Prudhoe Bay.
OPEC decreased production massively in the 1980s without being able to prop up prices. Saudi Arabia alone decreased production from 10 mmbbl/d down to 3 mmbbl/d before abandoning their efforts.
By the 1990s OPEC’s inability to control prices and internal disputes effectively caused the First Gulf War. OPEC was in complete disarray. Cheating on quotas by countries like Venezuela resulted in them flooding the market not to control worldwide prices, but to instead punish their own members.
The production cuts of 2008/2009 were probably their most successful attempts at manipulating prices. Having said that, they let prices get too high, which resulted in the explosion of additional supplies from the U.S., among other non-OPEC producers. It also again spurred the development of alternative fuels and fuel efficiency efforts, which have cut into demand growth.
Finally, they are in no way now attempting to keep prices low. Low prices are bankrupting members such as Venezuela, Nigeria, Iraq, Iran, Algeria, and Libya and contributing significantly to political unrest in each country. The Saudi’s won’t cut because they know they can’t count on their fellow members not cheating on quotas (a lesson learned in the 1980s and 1990s). The Saudi’s aren’t stupid. They know that the best thing to do is shift away from being the swing producer and instead let the high cost producers (most notably U.S. shale) be the swing producer. That’s not an example of the effectiveness of the cartel. It’s an example of abandoning the role of a cartel and embracing the free market.
The graph has had the oil prices shifted by 18 months and inverted. Changes in oil prices are leading GDP.
Sure, I’m not saying California hasn’t experienced a reduction in prices. It just hasn’t been nearly as big as the rest of the country. Also, I think the impact from the Torrance refinery has been more than $0.10 to $0.15. Check out the below graph. You can see that the February '15 explosion resulted in a divergence in prices. You are right that California is it’s own little market though and that local impacts have historically caused crack spreads to diverge. The reason why it is noteworthy in this case is that the timing largely overlaps and significantly offsets the price declines experienced with crude.
You might think that but perhaps they don’t. The goals of a cartel is likely much wider than simply the highest possible cost for their product. Certainly in the case of nations as members of a cartel, there would be political considerations as well. Such things might include helping some of their members by allowing them to sell above or below the price they’ve all agreed to stick to, or by providing leverage over other countries, either to punish them by raising their prices, or rewarding/influencing them on future dealings by offering deals to lower prices for other considerations.
I didn’t say the highest possible cost. I said the highest stable price. They would rationally want to avoid spikes as well. They would rationally want to set a price low enough that would reduce the ability of alternatives to compete not to mention non-member countries to compete as those would set up future lower prices.
The rest of your post is ignoring the reality of the situation. They aren’t coordinating right now on anything. You’re ignoring the public infighting that has been occurring. The begging by members such as Venezuela for them to agree on production cuts. Iran’s refusal to participate in any future cuts while calling on the rest of the group to cut. You basically have Saudi Arabia outlining their strategy and by default the rest of the cartel can’t do anything else.
OPEC has about 42% of the global production. They can engage in price fixing in the same way the US, Russia, China, and Canada can. By unilaterally cutting production. They did it in the past because Saudi Arabia was trading local prestige for money. However, after the price of oil skyrocketing, those governments got use to spending the money and now their budgets are dependent on those revenues. There are no OPEC countries with a balanced budget and only Saudi Arabia has a large reserve saved up.
They could afford to cut production back when budgets were small and they controlled more of the market but for the most part OPEC is a spent force.
OPEC’s purpose is price fixing in the same sense that every guy who goes bar hopping does so for the purpose of taking the hottest chick home with him. Sometimes it works out, but more often it doesn’t.
Not a bad post. I would note that it’s possible that Qatar and Kuwait are still posting balanced budgets. I don’t think their information disclosures are all that great, but they are definitely in okay fiscal shape with at worst a small deficit. Also, the UAE, Kuwait, and Qatar also have decent sovereign wealth funds in addition to Saudi Arabia. They are all best positioned to sustain low prices for longer. Finally, I think OPEC’s share of global production is closer to 33% than 42%. Having said that, it’s not as easy a number to quote as you might think. Depends on if you are counting NGLs, refinery processing gains, condensate, other liquids. I usually like to quote oil production at 96 mmbbl/d with OPEC accounting for about 32 mmbbl/d of that. Having said that, their impact is far greater than 33% or 42% since what really matters is the portion of net exporting that they account for, which is far greater.
ISTM that the most correct answer to the question in the OP is a combination of two factors which have already been mentioned individually.
Essentially, the extent to which oil prices influences a given economy is driven by the extent to which that country is a net exporter or importer of oil. Even if a country is a net importer, the influence of lower (or higher) prices is not nearly the same if they import 10% of their oil as it would be if they import 90% of their oil.
So the fact that the US imports a much lower percentage of their oil than they used to means that the impact of oil prices is a lot lower than it would have been at a time when they imported a much higher percentage. And since the impact is that much smaller, it can get swamped by a lot of other factors which are also impacting the economy at the same time.
The economy is not simple. Almost always when one part of the economy is rising it means some other part is falling. Look at a success story like Microsoft or Walmart and you’re also looking at their competitors that went out of business. Look at the rise of Netflix and you’re looking at the fall of Blockbuster. Cars replaced horses. Electricity replaced steam. Air travel replaced trains and ocean liners. Video killed the radio stars.
I was referring to the goals of a cartel, which are likely to be considerably wider than price stability, not how effective the cartel is in meeting those goals. There have been periods when OPEC is very successful and times when it hasn’t, and times when it’s been rather murky, as they certainly aren’t publicly discussing their true intent when they take (or fail to take) actions.
By definition a cartel’s purpose is to manipulate prices or competition in order to maximize members’ profits. Now you may say that we don’t know the true goals of this specific cartel, and that’s certainly true. My point though, is that they are not acting like a cartel. Further, I think the member countries certainly don’t have a uniform set of goals and intentions. In fact, I think what we really have is a single country that holds all the cards and makes all the decisions. I think that one country is doing something that most of the other members disagree with. They are explicitly stating that they will let the market rebalance itself. That’s not the actions of a cartel. They’re all in it for themselves.
