Tuesday, August 01, 2017

OPEC struggles to hold the line in a make-or-break fight to limit oil production

See OPEC Has a Crippling Problem: Its Members Can’t Stop Pumping: Eight months after a landmark deal to cut oil output to force prices up, big budget obligations drive members to keep producing by Benoit Faucon, Lynn Cook, Summer Said and Georgi Kantchev of The WSJ. Cartels always have problems keeping members from cheating. Also, if they drive the price up, that induces more producers to enter the market. There are links to related posts at the end and some quotes from the book Free to Choose by Milton & Rose Friedman, published in 1980 that hinted at OPEC's decline. Excerpts:
"Eight months after the Organization of the Petroleum Exporting Countries announced a plan for its 14 members and 10 allied countries to withhold almost 2% of the world’s oil every day to boost prices, seven of the 11 OPEC members that pledged to cut appear to be producing more oil than promised.

Crude prices have actually fallen, by 7.6% to $52.52 a barrel, since the beginning of the year—half what the cartel called a fair price just three years ago and a level that some say is here for the long term.

Previously, low production costs meant OPEC members profited even when oil prices fell. These days, members have ramped up government spending to keep populations happy and cover military expenses, and don’t have a cushion to let oil revenues slip. Their strained budgets can be covered only through increasingly high prices per barrel, and if prices are low they need to produce more."

"OPEC’s share of the global oil market has shrunk to 40% today from 55% in the early 1970s, when its embargo on sales to the West quadrupled oil prices in six months."

"The dynamic working against OPEC is that, collectively, its members need the highest oil prices of any industry player—more than companies such as Exxon Mobil Corp. , Royal Dutch Shell PLC and most U.S. shale producers, according to Goldman Sachs ."

"OPEC needs $10 to $20 a barrel more than Big Oil and U.S. exploration and production outfits"

"The U.A.E. spends only $12 to pump a barrel of oil but needs oil to sell at $67 to cover its government expenditures"

"The U.A.E. is among OPEC’s worst offenders in pumping too much oil. It has cut only about half the amount it promised"

"OPEC on Nov. 30 agreed to cut production by 1.2 million barrels a day"

"Instead, member exports in June were 120,000 barrels a day lower than October"

"Saudi and other OPEC officials once believed U.S. shale producers needed oil prices of $80 a barrel or higher to function."

"The continued production helped pay down debt while companies reorganized. When the producers emerged from bankruptcy, new owners had the old debt load wiped clean. With a clean slate, plumbing once expensive shale fields became more economical. Other companies on the ropes sold to stronger rivals that can manage the fields more effectively or issued new shares to raise capital."

"seven of the 11 OPEC members that pledged to cut were producing more than promised" 

Now passages from Free to Choose:

"Price controls on oil and other forms of energy by the U.S.
government in their turn prevented information about the effect
of the OPEC cartel from being transmitted accurately to users
of petroleum. The result both strengthened the OPEC cartel,
by preventing a higher price from leading U.S. consumers to
economize on the use of oil, and required the introduction of
major command elements in the United States in order to allocate
the scarce supply (by a Department of Energy spending in 1979
about $10 billion and employing 20,000 people)."

"A monopoly can seldom be established
within a country without overt and covert government assistance
in the form of a tariff or some other device. It is close to im-
possible to do so on a world scale. The De Beers diamond monopoly
is the only one we know of that appears to have succeeded.
We know of no other that has been able to exist for long without
the direct assistance of governments—the OPEC cartel and earlier
rubber and coffee cartels being perhaps the most prominent exam-

And most such government-sponsored cartels have not lasted
long. They have broken down under the pressure of international
competition—a fate that we believe awaits OPEC as well. In a
world of free trade, international cartels would disappear even
more quickly. Even in a world of trade restrictions, the United
States, by free trade, unilateral if necessary, could come close to
eliminating any danger of significant internal monopolies."

I should point out that
De Beersonce had a 90% market share and it is now 31%.

Now links to related posts:

Oil companies have cut costs and can now profit at lower prices

OPEC Stumbles in Face of Oil Glut (example of how hard it is for cartels to achieve their objectives)

New Technologies Open Up Oil And Gas Reserves

Factors Influencing The Price Of Gas

Another Journalist Misunderstands Supply And Demand

Some Historical U.S. Gas Prices

No comments: