OPEC, which has far exceeded the average life of cartels, is on the brink of failure. Though cracks have been developing in the cartel since the start of the current oil crisis, the group has managed to stay together so far. Nevertheless, the success of the current OPEC deal for production cuts will decide its future as a cartel.
What is a cartel?
A cartel is a group of like-minded producers, who act in concert—or collusion—to achieve a shared goal of increasing their profits by means of restricting supply, fixing prices, or destroying their competition by illegal means. The average life of the 20th Century cartels has been 3.7 to 7.5 years, according to various studies by Margaret Levenstein and Valerie Suslow. In the past two centuries, cartels have been able to influence prices by an average of 25 percent.
History of OPEC’s success in boosting oil prices
Since its inception, OPEC has been fairly successful in boosting prices by various means. A few of the price increases, however, were due to reasons other than direct OPEC action, nevertheless benefitting their members.
What has OPEC done to support oil prices in the current oil crisis?
OPEC, as any cartel would, has used two strategies to influence oil prices. However, both have been unsuccessful in achieving their objectives.
…The market believes that if crude oil prices remain above $50 per barrel, U.S. shale oil production will increase. For this reason, OPEC is finding itself in a catch-22 situation: It is losing market share to the U.S. shale oil drillers, but it is unable to propel prices considerably higher. It is losing its ability to influence prices above a certain level.
What happens if the Cartel fails in its objective
A cartel is able to hold its members only when it fulfills their objective of higher prices, which has not been the case with OPEC. The member nations will now look to fulfill their objective by cheating and acting individually, according to their requirement.
Saudi Arabia, which was the leader of OPEC and the price setter of the world, is losing its clout in OPEC. Even in the current round of production cuts, most of the work is being done by Saudi Arabia, whereas the other members are shying away from their designated quotas.
OPEC has far outlived the average lifespan of a cartel, but if the OPEC members don’t regroup and act together, chances are that the cartel will come to an end very soon.
Full article: The End Of OPEC Is Near (OilPrice)