OPEC and how hard it is for cartels to achieve their objectives in the news

There will be some passages from Milton Friedman and the book The Economics of Public Issues on how it is hard in general for cartels.

See Saudi Arabia Is Losing Its Iron Grip on Global Oil Markets: Rising U.S. production and internal OPEC+ pressure limit the kingdom’s sway over prices. Trump is a new wild card by By Summer Said, David Uberti and Benoit Faucon of The WSJ. Excerpts:

"Saudi Arabia’s sway over the Organization of the Petroleum Exporting Countries long meant unquestioned dominance of the global oil market. Those days are over, at least for now. 

The kingdom is struggling to execute its plan to keep prices elevated. Higher prices would help pay for Saudi’s infrastructure-spending spree, including $1 trillion of projects designed to rapidly pivot the economy away from oil. It would also pinch drivers at the pump and contribute to risks that inflation could stage a global comeback.

But the cartel’s increasingly fractious members are pushing to pump more and maximize short-term profits, in part due to the expectation of growing competition from U.S. shale drillers emboldened by former President Donald Trump’s re-election."

"Ahead of Thursday’s scheduled meeting of OPEC+, that creates a dilemma for its de facto leadership in Riyadh: continue defending the price of oil, or fight to take back market share.

It appears the Saudis aren’t inclined to start another price war. 

Saudi officials say the kingdom is likely to keep the spigots tight on its own production, further pushing back plans to loosen them that were already delayed twice."

"Yet another major producer, the United Arab Emirates, has been allowed to add more barrels into the market from January. And Iraq and Kazakhstan are also lobbying the cartel to bring more production of their own, which would boost supplies further and likely depress prices."

"Crude output in the Americas has already helped slash the OPEC+ slice of global supplies to some of its lowest levels since the broader group’s 2016 founding.

OPEC+ production cuts, pushed by Saudi Arabia, have made that even more uncomfortable for other members.

“It’s really easy to be part of a cartel when a market is growing,” said Jorge León, a Rystad Energy analyst who formerly worked for OPEC. “Nobody wants to be in a cartel where they are cutting production.” 

The upshot is that OPEC+ has lost some of its geopolitical heft in Washington. U.S. Assistant Secretary of State for Energy Resources Geoffrey Pyatt said the cartel’s market power these days is “less than you would imagine” as oil producers elsewhere—Brazil, Canada and Guyana—pump gushers of crude."

"OPEC watchers say the shift in power has undermined Saudi Arabia’s ability to corral the cartel’s members or attract new entrants.

That tension spilled into public view last week, when an Iranian OPEC+ delegate published a commentary on the state-run news agency arguing that the cartel’s Saudi-led policy to keep prices elevated has largely been a failure, in part because it motivated the U.S. and other producers to pump more. The delegate noted that Angola already quit the cartel, and speculated that other countries could soon follow as a result of the policy."

"The cartel’s internal analysts, overseen by a Saudi official, have trimmed their estimated demand growth this year and next for four consecutive months. Those dimming expectations have contributed to the group’s loss of credibility—among traders, U.S. officials and even some delegates—to accurately forecast the market. 

The International Energy Agency estimates global supplies will outstrip demand by more than one million barrels a day next year if the group doesn’t cut output."

See OPEC+ Delays Oil Output Hike Once Again: The group led by Saudi Arabia and Russia agreed to extend voluntary production cuts of 2.2 million barrels a day until the end of March by Giulia Petroni of The WSJ. Excerpts:

"The move suggests the alliance is prioritizing price-support efforts over market share, as hiking production would risk tipping global markets into a glut due to plentiful supply from the Americas and faltering demand growth in China, weakening prices."

"The OPEC+ alliance has struggled to keep prices elevated in recent months, caught between its own revenue needs and the risk of losing market share."

"The decision from the alliance to delay output hikes comes despite OPEC’s robust oil-demand growth estimates. The cartel trimmed its forecast for demand growth in November for the fourth consecutive time, but still sees growth of 1.82 million barrels a day this year and 1.54 million barrels a day the next.

OPEC+ faces significant challenges also on the compliance front, as several members including Russia, Iraq and Kazakhstan exceeded their production quotas in the past, giving the group less room to reintroduce barrels into the market. The quotas are designed to restrict global supply and shore up prices."

Now passages from Milton Friedman's book 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- ples. 

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."

The book The Economics of Public Issues by Roger LeRoy Miller, Daniel K. Benjamin and Douglass C. North has a chapter on cartels that discuss OPEC and why it cannot always meet its objectives. They point out the conditions necessary for cartels to work:

Now links to related posts: (2017)

OPEC Stumbles in Face of Oil Glut (example of how hard it is for cartels to achieve their objectives) (2017)

OPEC struggles to hold the line in a make-or-break fight to limit oil production (2017)