Still, the compelling question remains whether OPEC members will comply with existing decisions to lower production, let alone new ones, said economist Peter Dawson.
OPEC problem: production 'cheaters'
"OPEC members are getting into a bit of quandary, and it's one we've seen before, cyclically, in the oil market. States know that if they all cut, their action will support prices some," Dawson said. "The problem has been that historically, some members 'cheat' a little and produce over their quota, thinking their small increase will not affect prices that much, and they will reap extra revenue as a result. When several members do this, the price of oil continues to drop, and so does the cartel's effectiveness."
In the past, cheaters have been small OPEC states, such as Iran, Libya and Nigeria, Dawson said. Oil Tuesday fell 37 cents to $54.58 per barrel. Oil has plunged more than 60% since hitting a record high of $147.27 per barrel this summer, as both long-term investors and short-term traders exited long positions in the markets.
Lower production, and hence cartel discipline, will be needed to prop-up prices, due to likely lower 2009 global oil demand stemming from the developed-nation recession (Europe, U.S., Japan) and a global economic slowdown, Dawson said. Recent oil sector studies agree that demand is moderating. OPEC now sees 2009 global oil demand at 86.68 million barrels per day, down 530,000 barrels from its previous estimate. Meanwhile, the International Energy Agency (pdf) sees 2009 global demand at 86.5 million barrels per day, down about 690,000 barrels from its previous forecast.
Dawson said an OPEC production cut isn't feasible for the special meeting on November 29, given that OPEC members have had such a short time to prepare arguments concerning why their nation should be exempt from another production cut. A December 17 cut is likely, however, probably on the order of 500,000-600,000 barrels, he said.
Still, Dawson underscored, "that's a production cut in theory." In practice, "pressure to maintain oil revenue amid falling prices has led to cheating, which has undermined the decision's effectiveness. It happened in the mid-1980s and again in the latter half of the 1990s."
Oil Analysis: If OPEC exhibits production discipline, that would help place a floor under prices. Still, if historical behavior is an indicator, the cartel will fail again in a down market: revenue pressure for state coffers is so great that it tempts some members to cheat. The view from here is that the pattern will repeat itself, particularly if oil falls below $50 per barrel.
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Reader Comments (Page 1 of 1)
11-18-2008 @ 12:12PM
EMIL J KOVACH JR said...
SAUDI ARABIA Is Committed To Stability In The Crude Oil Market, And Co-operation With OPEC Members, And Has Always Balanced Out Put To Market Demand, And Recently, Agreed To Cut Backs, At The Request Of OPEC Members. But SAUDI ARABIA Will Not Agree To Further Cut Backs, At It's Sole expense, It Is Un-Clear If Any Other Members, Are Actually Keeping Their Part Of The Deal.
Recent Un-Realistically High Crude Price, Has Encourage Others To Produce And Sell EVEN MORE PRODUCT, To Make Up For Recent Cash Shortfalls, And SAUDI ARABIA Believes, They will Continue To Do So, Regardless Of Any pledge, To Actually Cut Back On Their Production.
The Market Price Has Not Responded To These "Cut Backs" In The OPEC Expected Manner, And Probably, Will Not, In The Future. If SAUDI ARABIA Is Expected To Make Further "Cut Backs" The argument To Do So, Will Have To Be Very Compelling.
EMIL J KOVACH JR
11-18-2008 @ 7:40PM
Jonathan said...
Nothing would please me more than to see these greedy OPEC nations brought down low. If oil dropped to $5/gallon it would decimate their economies. Perhaps we will see that in the next few years. How delightful.