The Saudis are key player in the OPEC cartel. They’re the biggest and lowest cost producer. And they are usually the ones expected to significantly alter their output. When the Chavezes of the world stamp their feet and throw temper tantrums complaining that the oil price is too low, they are very reluctant to give up major capacity (and when they do give up major capacity it’s usually an inadvertent result of mismanagement). OPEC is great for oil producers, but not so great for the average customer. So why not bribe/subsidize the Saudis to leave OPEC?
I propose we promise them a long term price guarantee. That may not be a bribe, but bribe just sounds sexier and more dangerous. We’ll give them them difference between $55 (just a number I picked) a barrel and the market price on the condition that they run at peak output and turn a deaf ear to OPEC production quotas. Maybe even ramp up the price fifty cents for every dollar oil goes below $35. Let’s get the Saudis to overproduce.
What does this accomplish?
The worst case scenario is that someone else steps up to limit oil supply. The prices stay the same and we owe the Saudis nothing.
A better case, is that world oil prices decline. This is great for consumers all over the world. It also seriously affects the revenues going to Venezuela, Iran, and Russia. (Exxon and the oil companies would also probably return to where they spend the most of their time: making only modest profits.)
And what’s the cost? We’d be overpaying, maybe by a lot, for something like 10 million barrels of oil per day. But since we use roughly 20 million barrels of oil per day in America, we gain every time oil is below the $55 price floor.
This may not exactly be free trade or fair trade or legal. But it would be awesome if it worked.
The answer is rather simple. Basic econ tells us that price, supply, and demand all work together. High school grads have this concept down. What they don’t discuss is the principle of a cartel (OPEC). It is actually a classic example. The problem is this. OPEC tells Chavez he can’t crank out more than 500K barrels a day. Price on the market goes to $69 a barrel (fun number). Chavez says “Hey, that’s a lot of money for me to subsidize donkey’s in my country.” He’s smart like that. So he decides to crank out another 100K a day to someone like, of China, maybe. Under the table of course. Chavez makes lots of dough but the Chinese, greedy little bastards, go to Russia and tell them what they are paying. Putin needs some Vodka baby, so they drop their price a buck a barrel, and voila we are back to free enterprise. Morale: blaming cartels is horse crap. Consumers have the control as long as they act responsibly, but I contradict myself.
There’s a good reason why I was able to pay absolutely no attention in two econ classes in college. Most high school grads can’t grasp basic econ.
I also realize that most of the OPEC countries are probably going to cheat their asses off WRT their quota. The Saudis are usually the primary enforcers of any cutbacks. That’s why I think we should work with them. They’ll go balls out, while the other OPEC countries try to kill each other not abiding by the quotas… OPEC is a completely dysfunctional family without Daddy Arabia.
On a side note, I was reading through an oil price econ paper last night. It noted that during one time period of high prices (early 80s I think), OPEC production soared while non-OPEC (excluding USA and former Soviet Union) stagnated. But once prices went back down, the non-OPEC countries then increased production. The paradox, apparently, was explained by bad tax and regulatory policies in those non-OPEC nations.
Unfortunately that paper was from 1998, and thus a little out of date. However, I have seen some news reports that now with prices sky high, most of the increased production is actually coming from OPEC, with non-OPEC countries barely increasing production.