OPEC: A Flock of Prima-Donnas or a Cohesive Cartel?
If historical evidence is anything to go by, the former appears to be the case. In an effort to curb falling oil prices, which could have damaging effects on some of the petro-dollar-reliant economies, OPEC has announced production cuts since crude fell from a $150/barrel high (now at $40/barrel). However, the effectiveness has obviously not been great.
One of the prime culprits is that not all of the countries follow production quotas. This erodes OPEC’s internal cohesiveness and its external credibility.
Falling oil prices present an especially difficult scenario for OPEC. Many of its member states rely on petro income to survive, so are disincentivized against a production cut. This, of course, enrages larger producers like Saudi Arabia, which has to suffer fiscally from lower production without seeing the intended rise in price.
Previously, Saudi Arabia has pumped production to drive down the price of oil to as low as $10/barrel, effectively starving the more oil-dependent regimes of income. It proved to be effective, but will Saudi Arabia do the same this time? We consumers can only hope.
Bo-yun Liu
