Oil prices and OPEC (part 2)

The International Energy Agency (IEA) has said that its members are going to sell some of their oil reserves to bring down the oil price. The idea is that this will help the global economy and stop it falling back into recession because of high oil prices.

In my post on June 8, I said that OPEC were short-sighted to not increase production. The argument was that if they increased production now then the price would fall but at least they would increase or at least maintain volumes. If they didn’t increase production then the high oil price would slow down the world economy resulting in falling demand for oil and both lower prices and lower volumes. They were better to increase production and accept a lower price, that would be better than holding production and seeing lower prices in the long run.

Some of the world’s major countries, led by the USA, have said that they will release oil onto the world markets. Now OPEC will see lower prices and not get the increased production either.

Is this good or bad for OPEC?

It is being reported that OPEC producers will not be happy with the move, but I don’t think this should be the case.

Prices will fall in the short-term and the OPEC countries won’t benefit from higher volumes, so they will be worse of than if they had increased their own production. But, longer term, if the IEA intervention is successful then the lower price will help sustain global growth and then OPEC producers will benefit from increased demand. They will still have kept their volumes down which will ultimately keep prices up.

The IEA have made a short-term intervention but in the end OPEC members will benefit from a stronger world economy which will give them higher prices and they will still have the option to increase production later.

The IEA are releasing 2m barrels per day compared to global production of over 80m barrels per day, roughly an extra 2.2% per day. The problem that the IEA have is that they cannot do this indefinitely, are they avoiding short-term pain but running the risk of long-term pain instead?

It looks like OPEC may have just won a game of chicken with the IEA.

Today’s takeaway: Trying to manipulate a market may work for a while, but it can’t be done forever.

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