Make Econ Scientific

Why Is OPEC Letting The Oil Price Crash?

In January 2015

History is the key

In 1980, the Saudi’s oil minister, Yamani, warned OPEC it was trying to keep the price too high. They didn’t listen, and all agreed to cut production. The Saudis did, but the rest cheated. To hold their cartel together, the Saudis cut supply even more than promised, but the high price reduced demand and called forth North Sea and Alaskan oil. By 1985, the Saudi’s were pumping at about 30% of capacity and

the price was sliding anyway. The way things were going they would be pumping no oil at all in another two years. At the end of 1985 they opened the spigot , undercut the rest of OPEC, crashed the price and took back their market share.

And that’s the reason for today’s oil prices.

The cartel is still full of free riders and the Saudis are not about to play OPEC’s fool again. Besides, they know that the best way to bring the price back up is to keep it frighteningly low for a while and talk like it’s never coming back up.

The new Saudi king’s decision to keep Ali al-Naimi in his job as oil minister signaled to energy markets that the world’s top crude exporter would not flinch from its policy of refusing to cut output as it fiercely guards market share.

Arabian Business.com, 31 Jan 2015

For a more complete history and its application to climate policy, read Chapter 8 of Carbonomics (free, #19).