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OPEC Tactics Raise Production Costs Around The World

Rig

Efforts by the Organization of Petroleum Exporting Countries (OPEC) have raised the costs of producing oil and gas by roughly $160 billion, transforming the industry, according to a new business study from Duke University, KU Leuven and the University of California in Los Angeles.

Thirty-four years of data tracking 13,248 oilfields show how the cartel has raised the financial bar to enter the oil and gas game.

"The question people usually ask about OPEC and other cartels is, 'Does it raise prices for consumers?'" said Duke economist Allan Collard-Wexler, one of the authors. "We found the cartel has also had other, broader effects on the economy."

OPEC’s key strategy since its founding in 1960 has been to control output so that barrel prices stay high. They did this through quotas and other agreements, but the group’s goals have been consistent. The unintended effect of this strategy was to drive producers to seek new and expensive methods of extracting oil from the earth, the study claims.

"We're essentially erecting skyscrapers in the ocean," Allan Collard-Wexler said. "It's like building a 10-story building in the middle of the Arctic. Many of these technologies - fracking, for instance—would not exist if not for the activities of the OPEC cartel.”

In agreement with classic economic theories on the effects of monopolies on an industry’s health, the study said that having a tightly bound cartel manipulating markets raises the overall costs of production.

Related: Is It Time For OPEC To Turn The Taps Back On?

“That's an aspect that has received less attention than prices. And it has broad implications for economic growth,” the economist said.

OPEC is the world’s largest oil cartel and produces roughly 40 percent of the fossil fuel found in international markets, but major producers like Russia, the United States and even China are not a part of the group. The newest bloc-wide agreement pledged to lower production by 1.2 million barrels per day through March 2018.

By Zainab Calcuttawala for Oilprice.com

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  • GB on September 13 2017 said:
    Perhaps more specifics on the what components exactly have experienced incremental cost of production i.e skilled labor, licensing, drilling, equipment, testing, production etc might be in order. Also, what about the effect of new technology on E&P over the last few decades, which one might intuitively assume bears a positive effect on cost savings.
  • James Rose on September 12 2017 said:
    "Many of these technologies - fracking, for instance—would not exist if not for the activities of the OPEC cartel."

    Year hydraulic fracturing was invented: 1947

    Year OPEC was founded: 1960

    Perhaps why Duke is a good school, but not considered upper-tier.

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