Oil prices and OPEC

OPEC will meet today (8th June) to decide levels of production.

The FT says this:

‘A large increase in production could damp current high prices, while a decision to maintain production levels would set the scene for a large drawdown of oil inventories and price rally, oil traders believe’

But is this really right?

An increase in production should reduce prices in the short-term, but will maintain or increase volumes.

Maintaining production may maintain or even increase prices in the short-term but it will cause a slow-down in the global economy so there will be a drop in demand later, and that will lead to a drop in price.

Either way there will be a drop in price, it just depends on your timescale.

The first scenario leads to lower prices with higher volumes and the second to lower prices and lower volumes. OPEC should increase quotas.

Today’s takeaway: Timescales matter. You need to know if your competitor is playing a long or a short game to be able to predict their actions.

Update: OPEC talks have broken down without any agreement to increase production. Looks like the short-sighted members have got their way.

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2 Responses to Oil prices and OPEC

  1. Brian says:

    What might be the effect if we factor in that oil is a finite resource? By increasing production now, and so depleting reserves, might OPEC members be losing out on maximising revenues over the lifetime of the oil reserves?

    • Barry Hughes says:

      It might be a finite resource, but that doesn’t mean that there aren’t alternatives. If the OPEC members keep oil prices too high then they will incentivise oil users to invest in alternative technologies. This would then push prices down in the long term.

      If there wasn’t this type of effect and all they wanted to do was maximise revenues over the life of the resource then they could just halve production overnight and see a huge increase in prices.

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