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OPEC Is a Saudi Stick

On 27 November, OPEC met in Vienna and, surprisingly, decided against cutting production. You’re enjoying the lower gas prices. Libya and Venezuela are facing catastrophe. There is no economic rationale to explain this decision. Since no one ever acts against their own interests, there must be an explanation based in something other than economics.

It seems clear to me that Saudi Arabia is using ever-lower oil prices to punish fellow OPEC member Iran and non-member Russia for their support of Bashar al-Assad. There’s no doubt this will be effective, until it isn’t. If the Saudis go too far in their dominance of their OPEC partners, there remains little incentive to stay in the cartel. Libya and Venezuela probably can’t survive much longer with such low prices. Iran will only be pushed so far. The U.S., acting on economic interests, is competing with the Saudis and driving prices ever lower. OPEC seems irrelevant in a world where non-cartel producers matter and OPEC is a Saudi foreign policy tool.

2 Comments »

  1. So, how does this affect the U.S. as we try to recover from our financial crisis? How long are low gas prices expected to continue? It seems irresponsible for the U.S. to continue playing this game.

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    • Thanks so much for your comment.
      In this particular matter, U.S. free-market operators are following the rational actor model. We can produce oil, so we do. The Saudis are wielding oil prices like a truncheon. They have Iran and Russia on the ropes.
      We are entering a new era of thinking on gas prices. Increased production capacity in the U.S. is making a huge difference, but we are also beginning to see the benefit of advances in auto fuel efficiency, diversity in electricity production, and natural gas coming into its own. In the near-term, there’s going to be some perturbation in small, local parts of the U.S. economy as priorities get shuffled in the face of lower prices. Things like shipping capacity are going to get moved around, get a little cheaper, and benefit other industries dependent on rail. The boom towns of the current oil craze are going to take a hit. Plans for new refineries are probably going to give up their spots on the front burners. Keystone XL has largely been overcome by events, until the day it isn’t.

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