Country-by-country coordination of oil supply is more difficult now than it was in past efforts by the Organization of Petroleum Exporting Countries to make it work.
The strategy nevertheless lies at the core of a vague plan OPEC ministers described in Algiers on Sept. 28.
With supply coordination, OPEC has been fairly successful. The average price of crude oil since the 1970s is higher than it would have been if the group hadn’t restrained production.
But it’s a clumsy project.
OPEC confronts the classic hazard of cartels: Price elevation born of supply restraint tempts participants with spare capacity to cheat--and they do.
Compounding the challenge are conflicting interests and outright antagonisms among OPEC members.
OPEC has muddled through with pragmatic flexibility, adapting policy to economic and political imperatives--such as by abandoning country quotas when the tactic proved inconvenient or unnecessary.
And while OPEC held low-cost production idle, rising crude prices summoned high-cost supply to market.
The consequent surplus, aggravated by surging production from unconventional resources, crushed prices. The market is shedding high-cost supply mercilessly.
OPEC said that at a Nov. 30 meeting in Vienna it will repropose country quotas targeting group output of 32.5-33 million b/d.
For at least three reasons, cooperative production cuts of as much as 740,000 b/d will be elusive:
• Unprecedented hostility between Saudi Arabia and Iran amplifies the geopolitical dimension of OPEC decision-making.
• The group now competes against supply quickly available from tight-oil plays; formerly, it controlled all prompt supply and didn’t face immediate loss of market share.
• An implied condition, cooperation of non-OPEC producers--mainly Russia--has not worked before and remains problematic. State domination of Russian oil companies notwithstanding, Moscow doesn’t directly control production.
The only force able to rally producers to effective production restraint is shared pain intense enough to make all participating producers ignore other interests. No reason exists to think pain has reached that level among the crucial parties--especially when some of them want others to hurt.
(From the subscription area of www.ogj.com, posted Sept. 30, 2016; author’s e-mail: [email protected])