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Saturday, 16 April 2016

At Last OPEC No Longer Drives the Bus

How OPEC lost control of the oil market

This weekend, 13 countries with little in common will attempt to act as one – by coming to an agreement to curb oil production and prop up prices.
But the quarrelling members of the Organization of the Petroleum Exporting Countries, who meet Sunday in Doha, Qatar, have been acting less like a cartel and more like observers to a free market in crude oil. And the odds of the group reaching anything more than a fragile agreement to “freeze” output at current levels are slim.
Image result for infighting opec cartoonGiven the nature of the 46-year-old cartel, it’s no wonder. Two of the group’s members – longtime foes Iran and Saudi Arabia – are backing warring proxies in Syria and Yemen. Countries like the United Arab Emirates have fiscal buffers against low oil prices, while cash-strapped inflation-riddled Venezuela is scraping to avoid default. Nigeria counts on 1.7 million barrels a day to help meet the needs of 173 million people while Kuwait produces 2.8 million barrels a day with a population of 3.4 million.
Decades ago, there were effective cartels that managed notoriously unstable oil prices. Standard Oil, before it was broken up under antitrust laws, leveled off prices in the late 1800s and early 1900s. And from the early 1930s through 1970, the Texas Railroad Commission dictated output well by well in Texas, effectively taking available crude oil off the market to bolster prices at a consistent, albeit high, level.
These two price setters had a key advantage OPEC lacks. Standard Oil executives could make decisions around the breakfast table of founder John D. Rockefeller. And the Texas Railroad Commission did not have to negotiate with rival states or countries with differing interests.
OPEC, by comparison, is a fractious lot whose members want the others to cut production without cutting themselves. Usually that means cuts by Saudi Arabia, which has usually taken on the role of swing producer. But the kingdom is tired of losing market share while other oil exporters cash in and for the past year and a half it has been pumping at high rates, willing to persist even as prices crashed from more than $100 a barrel two years ago to $40.34 a barrel Friday.
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