OPEC SHOULD TRIM EXPORTS AND LET MARKETS DO THE REST

Nov. 16, 2001
The Organization of Petroleum Exporting Countries still has much to learn.

The Organization of Petroleum Exporting Countries still has much to learn.

It just can't give up politics.

For 2 years, the exporters' group has deftly managed production at the margin of the oil market against vacillating demand. After the price collapse of late 1997 through early 1999, it seemed to have learned how important it is to base production adjustments on early signs of demand swings.

The market had become sophisticated enough to outrun OPEC's formerly ponderous decision-making and supply responses. Indeed, OPEC aggravated market swings in 1997 and early 1999 by acting too late.

After that, however, it acted more preemptively, trying to head off major market imbalances and consequent price lurches. It earned praise from most observers for its adroit management of supply.

Now, however, comes the hard part.

It's easier to succeed as the marginal supplier when demand is growing than it is when things are heading the other way.

That's what's happening now. This year's economic slowdown, aggravated by the terrorist attacks of Sept. 11, has all but snuffed growth in global consumption of oil products.

Already this year, OPEC has cut its group quota by 3.5 million b/d. And it acknowledges the need to do more.

In Vienna this week, the group said "all producers" needed to remove 2 million b/d from the market. It said its members would trim collective output by a further 1.5 million b/d.

Then it went a step too far. It made its action contingent on a "firm commitment" by nonmembers by a simultaneous cut of 500,000 b/d.

That's asking too much. The market doesn't work that way-and shouldn't.

If OPEC is correct that the market needs 2 million b/d less supply. If it is willing to cut by only 1.5 million b/d, the other 500,000 b/d will go away naturally.

Because there will be 500,000 b/d too much oil sloshing about (if OPEC's projections are right), prices will fall. And producers with the highest costs will shut in wells.

It happens every time. It'll happen this time.

Why the need for a "firm commitment?" That's a useless step toward politics and dangerous step away from market freedom. It's another reason for an already suspicious consuming world to believe that oil prices result from collusion rather than market dynamics.

Producers and consumers alike are better off when the oil market works with as much freedom as is practicable under the delivery system's physical realities. Indeed, the market works impressively most of the time, even with an exporters' group managing supply at the margin.

That situation is tolerable only as long as the exporters base their decisions on market conditions and not politics.

The sudden demand for greater collusion is not healthy-not for the market, not for consumers, not for the industry, and least of all for OPEC itself.