Just to illustrate how complex oil markets are, especially when you consider the strategic interaction of the OPEC members, look at what’s going on right now, as summarized in Bloomberg Energy News article. There’s so much cheating on quotas, to the tune of about 10% of OPEC’s entire supply, that Saudi Arabia is trying to persuade the other OPEC members to raise quotas.
Huh? you may say. Here’s the logic: create the opportunity for member countries to earn enough under the quota that they have a smaller incentive to cheat, and if you stipulate a formal quota higher than the existing one but lower than the current cheating, then you’re more likely to get compliance. Saudi Arabia is arguing that continued cheating will send prices back to around $20/barrel next year, especially in light of increased production from non-OPEC members, as this Arab News article explains.
Rising oil prices are encouraging rival nations to invest in new fields, stealing OPEC market share. Non-OPEC countries next year should increase output by 1.3 million barrels a day, the International Energy Agency said today, 200,000 barrels more than expected last month.
This is why OPEC, and especially Saudi Arabia, is extremely nervous about increasing oil supplies in 2003. And they should be. Also, there’s no guarantee that OPEC members would adhere to a higher quota, there’s just a higher probability that they would comply.
What a great case study in the strategic interactions underlying cartel instability!