EL-ERIAN: The Oil Market Seems Surprised By OPEC - It Shouldn't Be
REUTERS/Jason Reed
OPEC's tactical decision would have been to cut its output ceiling as a means of limiting supply to the world energy market and, thus, boosting prices. But the impact of such a cut would have been less than in the past given the declining importance of OPEC oil in the global energy equation. Moreover, it is far from obvious that certain OPEC members would have abided by such a decision - especially countries facing significant financing issues (such as Venezuela).
Then there are the strategic considerations. Due to both technology innovations (such as those impacting shale energy) and environmental considerations, the oil industry faces significant secular headwinds. A sustained decline in oil prices, while causing short-term pain for producers, serves to alleviate some of these headwinds - first, and foremost, by making some of the alternative energy sources less commercially viable. Such a decline also imposes pain on non-OPEC oil producers.
Finally, let's not forget that there are historical precedents to such strategic behaviors, including from the late 1990s when Saudi Arabia decided to no longer play the role of swing producer. The immediate impact was a precipitous decline in oil prices - but one that placed OPEC in a better position for the subsequent 10-plus years.
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