The death of OPEC?

The death of OPEC
Posted Sep 11 2008, 07:01 AM by Douglas McIntyre
Saudi Arabia walked out on OPEC yesterday. It said it would not honor the cartel’s production cut. It was tired of rants from Hugo Chavez of Venezuela and the well-dressed oil minister from Iran.

As the world’s largest crude exporter, the kingdom in the desert took its ball and went home.

As the Saudis left the building the message was shockingly clear. According to The New York Times, “Saudi Arabia will meet the market’s demand,” a senior OPEC delegate said. “We will see what the market requires and we will not leave a customer without oil."

OPEC will still have lavish meetings and a nifty headquarters in Vienna, Austria, but the Saudis have made certain the the organization has lost its teeth. Even though the cartel argued that the sudden drop in crude as due to “over-supply”, OPEC’s most powerful member knows that the drop may only be temporary. Cold weather later this year could put pressure on prices. So could a decision by Russia that it wants to “punish” the US and EU for a time. That political battle is only at its beginning.

The downward pressure on oil got a second hand. Brazil has confirmed another huge oil deposit to add to one it discovered off-shore earlier this year. The first field uncovered by Petrobras has the promise of being one of the largest in the world. That breadth of that deposit has now expanded.
blogs.moneycentral.msn.com/topstocks/archive/2008/09/11/the-death-of-opec.aspx

What do you think?

This is an inherent problem with cartels. In order for them to work, each member of the cartel has to cut back his or her output. But the new quantity is not profit maximizing for the individual member, they have an incentive to produce a little more. While I wouldn’t argue that this is the death of OPEC, it is certainly good news from the consumer’s point of view. If Saudi Arabia cheats on the agreement, other countries may very well follow suit.

So, here’s to cheating:thumbsup: .

DISCLAIMER: The views and opinions expressed in these forums do not necessarily reflect those of Catholic Answers. For official apologetics resources please visit www.catholic.com.