## Monday, August 31, 2015 ... /////

### Saner oil prices: an expansion of OPEC could be a good idea

As kids, we were taught that cartels were a terrible thing. They represented the transition from the evil free market capitalism to the even more evil imperialism, the second stage of communism, which is controlled by multinational cartels. I've never parroted this stuff in front of a teacher but I hope that they would give me an A now. ;-)

Needless to say, this hostility towards cartels was sort of "confirmed" by the post-Velvet-Revolution capitalism, too. In fact, just like the systems of most Western countries, the Czech legal system is full of assorted laws and bureaus designed to fight against cartels and monopolies. Don't get me wrong: the competition is usually essential for capitalism to work well. But cartels may be beneficial as well and the top-down social-engineering of the markets attempting to create competition artificially is a counterproductive left-wing misconception.

Certain industries work very well when the number of competitors is relatively low. In that case, some activities are not uselessly copied. In some cases, a country may suffer because it has too little competition; but there can be too much excessive competition, too. The ideal number of competitors depends on the context, the market decides about the value dynamically, and no social engineer may ever be smarter than the invisible hand of the markets. Even though I am no fan of Islam – and people whose main achievement is their sitting on pressurized liquid ground pines – it seems to me that even OPEC has played a helpful role since its birth in 1960.

During the summer, the oil prices returned to their dramatic decreasing trend. A few days ago, the WTI crude oil was below $40 a barrel while Brent was$45. (A way to remember: the crude is cheaper and WTI-Brent is sorted in the anti-alphabetical order.) However, the trend of the oil prices was extremely different in the most recent 3 days. In those days, the oil prices jumped by 27 percent! (It's enough for oil to end August 4.4% higher.) Why? Some oil stockpiles have surprisingly dropped. The amazing U.S. fracking boom is predicted to fade away more quickly than expected.

And today, OPEC stated that it's ready to negotiate with non-OPEC producers to achieve fair and reasonable (which means high enough) oil prices. This announcement was by itself capable of adding nearly 9% to the oil price.

OPEC is currently controlling 40% of the world oil production. The percentage wasn't too different in the past. This percentage has always been enough for OPEC to possess the "control knob" for the global oil price. When OPEC itself cut the production, the oil price increased – pretty much enough for them to get more money even though they sell less oil. And they could do the opposite, too.

Sometimes, they needed to increase the production for the price to drop. Why would they want to make the price drop? Because the invisible hand of the free market forces them to be nice. They want the consumers to enjoy their lives and their cheap oil – because this is the recipe for the buyers to economically prosper and buy oil next year, too. Perhaps more oil than they are buying this year.

This logic makes sense and it did affect the real world. Even though there have been some oil crises and embargoes, the oil price has probably been more stable than it would have been without OPEC. And this stability is good pretty much for everyone.

However, these days, OPEC arguably no longer owns the control knob. If it reduced the oil production, the prices wouldn't go up too much. Instead, the non-OPEC competitors would fill the holes in the market and OPEC would lose its market share. This is just an example of the fact that cartels are never the evil, lethal, omnipotent, and eternal weapons which is how the Marxists and other leftists and social engineers describe them. A cartel is just another market strategy. Sometimes, it may work. Sometimes, it may break down.

Again, OPEC looks largely impotent these days. And it looks fragmented, too. Algeria and Venezuela are the members who demanded the production to be cut which would raise the oil price. However, Saudi Arabia leads the opposite – so far victorious – wing of OPEC. The Saudis seem to think that they can profit from oil at even lower prices and they are those who are the primary culprits of the price war. The Saudis simply think that they can destroy most of their fracking and other non-OPEC competitors (and the banking glued to the oil industry) if these low-price conditions continue for a long enough time.

So far, the Saudis have been able to preserve their market share. They remain profitable at the same moment. The break-even price of the Arab oil in the region is often said to be below $20, perhaps even$10. It should be expected that the Saudis like the cheap oil – exactly because the producers with higher break-even prices (and there are lots of those who are losing money these days!) don't like the low prices.

But this price war may ultimately wreck the oil-dependent industries. After all, it's a war. A war should be an exceptional period that ends at some moment. I think that it would be sensible for the producers (most of them, in OPEC and outside OPEC) to restore some peace, cut the production, and return the oil price to some levels at which most of them are profitable again.

I think that it wouldn't be such a bad idea if a sufficient portion of oil producers agreed to keep the barrel of crude e.g. at \$80 – or €70 – for years to come – by adjusting the production on a daily basis. The world economy is capable of dealing with the volatility in oil prices. But it may still be easier for the oil producers to adjust their production rate and they could do it in the right way to keep the price fixed.