Publications: Notes at the Margin

Too Late? (November 18, 2019)

 

The news for world oil producers was bleak last week. Forecasts issued by the International Energy Agency and the US Energy Information Administration predicted that oil-exporting countries would need to cut more from their production quotas in 2020 to accommodate further increases in non-OPEC output, increases that would not be matched by greater global consumption. The headline for an article by Grant Smith, a Bloomberg writer who follows OPEC by summarizing the research done at various investment banks, read "OPEC+ Risks Oil Slump Below $50 Without Deeper Supply Curbs."

 

Going forward, the OPEC members with low-cost (and greener) production should look to their interests rather than those of producers such as Venezuela, Russia, Norway, and the United States that benefit from their generosity. This will require aggressive, stern treatment of producing nations with higher costs. At some point, low-cost producers need to decide whether they are still willing to sacrifice their production so high-cost producers can keep taking market share. Put another way, low-cost producers must decide whether they wish to continue subsidizing the higher-cost producers.

 

Our conclusion is stark. Oil-exporting countries can act in their own economic interests, which means letting prices fall to squeeze out high-cost competitors, or stay in the "club," in which case many will face a dismal economic future.

 

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