Analysts Doubt OPEC’s Claims on Production Cuts

And now we get to see one of the on-going problem with any cartel: chiselling. Chiselling is where members of the cartel fail to adhere to the production/pricing agreements to try and increase their profit margin.

‘If the organization reverts to type and overproduces, prices will continue falling through the fourth quarter and into the first,’ Simon Wardell, an oil analyst with Global Insight, said Friday in a news release.

‘What should be expected is something of a compromise, an actual cut of approximately 800,000 barrels per day. This will help to solidify prices, but given current inventory levels the draw-down will be slow. The wild card is how severe the northern hemisphere winter is. A mild winter will put more pressure on OPEC to cut again when they meet in December.’

Of course Saudi Arabia acts as the swing producer and also as an enforcer. When it feels that chiselling is out of hand it can ramp up production and drive the price down considerably. This hurts the other members inducing them to stick to production agreements. The problem is that by all accounts Saudi Arabia is near its production peak which severly limits its ability to punish “defectors”.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Steven Plunk says:

    With the price as high as it is we should expect more chiselling. Why break quotas when the price is $15 a barrel? At $60 a barrel the rewards for cheating are very high.

    Even with a cartel long term prices should stabilize at a more reasonable level. I hope.

    Too bad we can’t figure out a way to break this cartel for good.

  2. legion says:

    Too bad we can’t figure out a way to break this cartel for good.

    Hey, Bush is trying to invade them all, but he’s just one man!

  3. TJIT says:

    Given the inability of OPEC to keep oil prices up after the price collapse in the 1980s I have never had much belief in their ability to control prices. More man behind the curtain and less OZ as far as I have been able to see.