OPEC’s Weapon of Mass Inaction OPEC just declared war on everyone-including itself.
The oil cartel’s hotly-anticipated meeting on Thursday ended with a whimper: No change to an output target that already wasn’t being observed. Oil prices, though, went bang: Brent crude fell 5% to around $72.40 a barrel after the decision was made. It will likely be years before we see triple-digit oil again.
Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, has a beef with a number of oil-market participants. It also appears to have woken up to the fact that OPEC has once again lost its grip on prices.
Saudi Arabia’s chief antagonist is fellow OPEC member, and main geopolitical rival, Iran. Lower oil prices squeeze Iran’s finances and capacity to oppose Riyadh’s aims in regional warzones such as Syria. As an added bonus, lower oil prices also hurt non-member Russia, another antagonist. The ruble fell another 2.5% against the dollar today.
Beyond geopolitics, Saudi Arabia must simply try to reassert its primacy in the market. For much of the past decade, OPEC seemed to be in the driving seat. In reality, high prices, particularly in recent years, partly reflected OPEC’s inability to ensure adequate supply in the face of strong demand from emerging markets such as China. The eventual result is as old as commodity markets themselves: efforts to mitigate demand and a surge in alternative supplies, especially from the U.S.
Saudi Arabia must try to preserve the value of its reserves still in the ground: 266 billion barrels on a proven basis alone. Cutting output might juice oil prices in the short term, but would also give U.S. producers an incentive to keep drilling and consumers to keep conserving. What is more, many OPEC members, along with Russia, would free-ride off others’ cuts and keep pumping. Even an announcement of a big cut on Thursday might not have helped since OPEC rarely sticks to quotas.
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OPEC’s Weapon of Mass Inaction |
