OPEC Oil

OPEC OIL….Matt Yglesias:

Saudi Arabia has a plan to boost their oil production in the near future. According to the NYT’s Jad Mouawad that “was seen as a sign that the Saudis are becoming increasingly nervous about both the political and economic effect of high oil prices.” But couldn’t we just see it as a sign that you can make more money than ever selling oil these days so it became worth the Saudis’ while to find ways to boost production? That’s the market in action.

Actually, I wonder if you can see it that way. My take is that spare capacity is so tight these days that a country like Saudi Arabia could make more money by cutting production than by raising it, even if they did it without any cooperation from the rest of OPEC. If they cut production by, say, a million barrels a day, that would represent 10% of their capacity. But my guess is that in the current market a reduction of that size would increase prices by more than 10%. Maybe by a lot more. In other words, it would be a net win for the Saudis. What’s more, it would have the added benefit of allowing them to implement better, more conservative oil field management, which would have paybacks down the road.

Now, in the long-term this kind of behavior really would lead to reduced demand. What’s more, in the medium term the Saudis might be concerned about the possibility of sparking a serious global recession that would hurt them as badly as it would hurt everyone else. But in terms of pure short-term revenue maximization, all of OPEC would likely be better off if they cut production a percent or two. The fact that they haven’t probably means they really are nervous about the “political and economic effect of high oil prices.”

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