Seriously, I laughed on Friday when I read the headlines and articles about how OPEC cut its production targets, and yet world oil prices fell.
Why did I laugh? Largely because it’s a combination of factors that illustrates that market outcomes are consequences of the interplay of supply and demand. So much of the time we hear wailing and tooth-gnashing about OPEC, OPEC’s market power, how OPEC controls world oil markets … all from a supply-oriented focus (and one that ignores the relatively substantial oil supplies from non-OPEC countries).
This combination of falling demand expectations and OPEC’s attempts to exert some form of control over market outcomes illustrates the weaknesses in that argument, and in OPEC’s purported power. That’s what makes the economist laugh when they reduce output and price falls :-).
Plus, as Jim Surowiecki reminded us on Friday, “On top of that, traders know that the fact that OPEC is saying it’s going to cut production is no guarantee that its members actually will cut production. OPEC, like any cartel, has perennial problems with cheating.” One of my favorite classroom activities is to enable my students to create an unstable cartel, and to explore what they have to do and the extents to which they have to go to make the cartel persist. This period of low growth is going to show just how unstable a cartel they are.
Oh, and I agree with those who wish that Surowiecki’s “The Balance Sheet” blog had a robust RSS feed. When will the New Yorker buy a clue?