Wednesday, December 17, 2008
Can OPEC make production cuts stick?
Via the Emirates Economist, OPEC has an integrity problem:
Iran, Venezuela, and Angola have failed to live up to pledges to reduce production substantially. Angola, Opec’s most recent entrant and next president, increased production last month, according to Opec’s forecasters.
Since I enjoy life's little ironies, I cannot help but notice that two of OPEC's leading cheaters, Iran and Venezuela (which had the stones to call for deeper production cuts just today, even though it had not implemented the last one), are the most openly anti-American of its members. So, our enemies are doing their level best to steal from and undermine the cartel that is fixing the international price of our most important strategic commodity.
I don't care who you are, that's funny.
Anyway, Our Friends The Saudis are leading the charge to cut production and enforce compliance with current limits. Doing so will require them to sacrifice market share, but in return they consolidate their position as the "swing producer," which will give them enormous leverage over the long term. And, as the Emirates Economist points out, they have a more immediate motive:
The dramatic drop in the oil price, now below the level at which Saudi Arabia can balance its budget, was the prime reason for the kingdom’s decision.
Don't go buy an SUV just yet.
4 Comments:
By 
joated, at
Wed Dec 17, 08:34:00 AM:
It is my greatest hope that the feds are currently buying up as much oil as they can at these reduced prices and stashing it in the strategic reserve.
By TOF, at
Wed Dec 17, 09:31:00 AM:
Cheating among OPEC members is nothing new. They did it during the embargoes of the 1970s too.
In fact, that '70s experience taught that generation that when you withhold your product users adapt and use less of it.
By Georg Felis, at
Wed Dec 17, 11:45:00 AM:
Hm, good point. The Dems froze all oil being plunked into the Strategic Reserve back when it was over $100, have they started putting it back in now?
By 
, at
Wed Dec 17, 12:17:00 PM:
It's my belief that the only real check on oil production is the world's storage capacity, including anchored tankers. As that capacity fills production will necessarily diminish, with expensive to refine oil (like Venezuela's) being the first to decline. So, if you can estimate storage utilization, watch that number, or as a proxy you can watch Venezuela's production if you want to. OPEC overall production numbers will follow.
