Has OPEC become predictable?
THE PROFIT-MAXIMIZATION PRINCIPLE MAKES IT EASY TO UNDERSTAND
THE RATIONALE BEHIND RECENT OPEC DECISIONS
DR. ALEXANDER MALANICHEV, NEW ECONOMIC SCHOOL, MOSCOW
OIL PRICES had been hovering over US$100/bbl until the first
half of 2014. Since July of 2014, prices started to decline and by
2015 W TI averaged just $49/bbl. Unlike the situation in 2008-09,
oil prices did not bounce back quickly with a revival in demand
(see Figure 1).
The current period of low oil prices appears more prolonged
and is similar to events 30 years ago. During that period, the oil
price drop was driven by excess supply, and prices remained at
a low level for about 15 years.
It is believed that the current oil crisis is caused mainly by
rapid supply growth both from conventional and unconventional
sources. Oil extraction was expanded primarily by conventional
oil producers in the Middle East and by unconventional shale
oil producers in the United States. Shale oil production in the
USA has increased from negligible amounts seven years ago to
more than five million barrels per day (MMb/d) today.
The appearance of the vast new North American supply
source, which can be accessed within a relatively short lead time,
has likely influenced decision making by the traditional oil market
regulator, OPEC, and its leader – Saudi Arabia.
In the face of historical supply interruptions or demand surges
accompanied by the oil price increase, Saudi Arabia has often
responded by increasing its production to help balance demand
and supply in the oil market. During the first Gulf War (1990–91),
the Venezuelan strike and the second Gulf War (2002–03), Hurricane Katrina in 2005, the surge in China’s demand in 2004, and
the Libyan crisis (2010–11), Saudi Arabia increased its production
to ensure that demand for oil was met in the face of declining
supply from other sources. Similarly, at times of weak or declining
global oil demand or supply recovery, such as the Asian financial
crisis in the end of 1990s or the global financial crisis in 2008–10,
Saudi Arabia scaled back its production in response to market