OPEC's Empty Agreement
Why Production Cuts Won't Change Much
On September 28, the Organization of the Petroleum Exporting Countries (OPEC) came to an agreement to collectively reduce oil production by as much as 740,000 barrels per day in an effort to boost sluggish prices. Although the announcement is the first of its kind in nearly a decade and was initially accompanied by a five percent rise in prices, the deal is, in fact, mostly meaningless. And that’s just fine.
The buzz around the agreement—some market analysts say it “changes entirely what OPEC is doing”—is premature, to say the least. The 14 member states of OPEC essentially “agreed to agree,” leaving the details of an actual deal for November 30, when hard decisions will be made on how much each country is willing to cut its production. OPEC members also concluded that at least three countries—Nigeria, Iran, and Libya—ought to be able to maintain or possibly even increase their production levels as they recover from sanctions or domestic political turmoil. That means that other OPEC members would have to make larger cuts.
Reaching a consensus among OPEC’s many members will not be easy. Libya barely has a central government. Iran and Saudi Arabia are geopolitical rivals. And even the relatively close-knit monarchies of the Persian Gulf disagree about conflicts in Yemen, Syria, and elsewhere. These differences in geopolitical interests erode trust and make it harder to enforce norms of collective action that are mutually beneficial.
Supposing OPEC does reach an agreement in November, it is not likely that its member countries will stick to it. In a detailed analysis of OPEC’s behavior since 1982, I found that OPEC cheated on its own aggregate production target a whopping 96 percent of the time—and every member is guilty of taking part. Worse still, changes in production targets had almost no impact on production itself. Maybe 2016 will be different, but this pattern cannot be ignored.
OPEC’s main problem is that it has no real way of enforcing its agreements. Members suchRead the full article on ForeignAffairs.com