OPEC #fail
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OPEC, the Organization of Petroleum Exporting Countries, is an intergovernmental body that represents 13 major oil producing nations. It was created in 1960 and its mission is "to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry."
Historically, OPEC countries produced almost 50% of the world’s oil supply. This has dropped to less than 30% in recent years as a consequence in particular of US shale production.
OPEC's activities include determining output levels for Member Countries, fixing the price of oil, and imposing quota restrictions and production cuts to maintain a balance between supply and demand in the industry. As the price of Brent crude oil has fallen to less than $75 per barrel, the incentives for members of a cartel like OPEC are to agree cuts in production.
However, after more than six hours of negotiations at the OPEC meeting in Vienna this week, the Member Countries failed to agree such a cut. The reason for this is that Saudi Arabia, the largest producer in OPEC, would not agree to it. Saudi Arabia has taken the decision that it wishes to defend OPEC market share and presumably disincentivise further investment in US shale. However, relying on short term pain (via low prices) in order to drive out some competing sources of supply and thereby restore an elevated and controllable price, looks to be a risky strategy. Particularly as the politics of supply are as important as the economics (who can bear the economic pain for the longest time) and alternative non-hydrocarbon energy sources become increasingly affordable and reliable.
If you would like to discuss these issues please do not hesitate to contact John Cassels at john.cassels@ffw.com