Viennese whirl

CARTELS work best when the members like and trust each other, when the penalties for breaching the rules are severe, and when outsiders are too weak to matter. OPEC, the cartel which controls 40% of the world’s oil production, fails on all counts. That makes bold decisions at its meeting today in Vienna unlikely, and sticking to whatever it agrees on even less likely still.

The conflicting interests inside OPEC arise from the differences in its members’ oil industries and economies. Saudi Arabia, Iraq, Kuwait and other Gulf producers can extract oil cheaply. They also—Iraq excepted—have a lot of cash in the bank. As a result, they can withstand a low oil price quite comfortably. On the other hand countries such as Nigeria, Venezuela and Iran are hard up. Their oil industries have less favourable costs. They cannot afford for the oil price to sag as it has been doing in recent months: the main Brent oil benchmark is now at a four-year low.

So the hard up and impatient countries want a production cut. But that requires the co-operation of their luckier colleagues, particularly the Saudis. A cut would indeed raise the price and bring some relief to the cash-strapped countries. But not everyone in OPEC would benefit equally. In particular, the Saudis and their neighbours worry that higher prices will mean that they will lose market share to non-OPEC countries. What is the point in stimulating your competitors to produce more? Too bad, say the hard-up countries. We are hurting now. Show some solidarity.

Yet solidarity is in short supply. OPEC members do not like each other. In some cases (Saudi Arabia and Iran) mutual detestation is the rule. All members habitually cheat. Even the current quotas, totalling 30m barrels a day, are being breached. Some other producers would like it very much if OPEC cut production. Countries like Russia are hurting badly from the fall in the oil price. But Russia and Mexico, two big non-OPEC producers, are not interested in doing deals with the cartel because they prefer to benefit from any production cuts it makes by boosting their market share. If prices go up nonetheless, so much the better.

So even if an agreement is reached to cut back production to the existing quotas it will not be enough to raise the oil price. In fact, new proof of OPEC’s indecision is likely to send it down further.

That is good news for America, which is still an oil importer, but also a big producer of fairly cheap oil, thanks to the boom in fracking (a technique to extract oil from small pores in rocks). The fall in the oil price has not yet made fracking unprofitable, and cheap energy is a boost to consumers there. It also adds a useful squeeze to other adversaries, such as Iran, Venezuela and Russia. That is another reason for the Saudis not to go along with demands for a hefty cut.

In short, if you want to know about the oil market, game theory and geopolitics may help more than geology.