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James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

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Just How Significant is the OPEC Announcement?

The Organization of Petroleum Exporting Countries (OPEC)  announced on Tuesday that its members could not reach an agreement to change OPEC's production quotas. How significant is that announcement? In my opinion, not very.

Forbes provides these details:

Analysts thought the 12-member group would boost production in an effort to cool off oil prices and take some pressure off the world economy.... Instead of raising production the Organization of Petroleum Exporting Countries ended a contentious meeting in Vienna without changing quotas for its members.

"We are unable to reach consensus to ... raise our production," OPEC Secretary General Abdullah Al-Badri said.

If OPEC were functioning as a traditional cartel, what would emerge from these meetings would be agreements on production quotas to which each country was going to adhere. But this is clearly not the case. Here, for example, is a graph of the OPEC production allocations for Saudi Arabia compared with how much the country actually produced. There was a brief period in 2006 and 2007 when the two series corresponded, though I believe the reason is that the Saudis wanted to use the cuts in announced OPEC quotas as cover for a production cut that they were intending to implement for other reasons. Perhaps they were unable to maintain production at the time, or perhaps they were unwilling. But in no sense was Saudi Arabia induced to cut production by the other oil-producing countries. Before and since that episode, the kingdom has pretty much ignored OPEC's production allocations.

Saudi Arabia Oil Production
Production and quota for Saudi Arabia. Production: crude oil including lease condensate excluding natural gas liquids and other liquids, thousand barrels per day, Jan 2004 to Feb 2011, from Monthly Energy Review, Table 11.1a. Quota: Jan 2004 to Oct 2007, from OPEC 2009 Annual Statistical Bulletin, Table 1.1.

Note that the line in the above graph labeled "quota" ends in October, 2007, because that is the last date for which OPEC publicized individual country production allocations. In fact, what OPEC announced in October and December 2006 were cuts in the allocations relative to an unspecified base; the graph above indicated these as relative to the previous quota. Here's what the actual data reported by OPEC look like:

OPEC Crude Oil Production Allocations
Source: OPEC 2009 Annual Statistical Bulletin, Table 1.1.

Beginning in November 2007, OPEC did not even publish quotas as target changes for individual countries, but instead simply announced overall targets for the entire group. These combined OPEC targets are graphed below, along with actual production. Again, the quotas have little or no bearing on what actually happened. Note that the group of countries covered in these series was expanded to include Angola and Ecuador in January, 2008. As far as I can determine, the official quota of 24.845 mb/d set in January 2009 is still in effect, though OPEC excluding Iraq is now producing almost 5 million barrels per day more than that.

Selected OPEC Countries
Production and quota for selected OPEC countries. Production: crude oil including lease condensate excluding natural gas liquids and other liquids, from Monthly Energy Review, Table 11.1a. For Jan 2004 to Dec 2007, this is OPEC members excluding Angola, Ecuador, and Iraq. For Jan 2008 to Feb 2011, Angola and Ecuador are included. Quota: Jan 2004 to Feb 2011, from OPEC 2009 Annual Statistical Bulletin, Table 1.1.

For these reasons, I think today's announcement that this "quota" will remain in effect is largely irrelevant. At best the statements issued from these meetings provide a noisy signal of the intentions of some OPEC members.

But if you're interested in what OPEC members really plan to produce, my view is that actions speak louder than words.

By. James Hamilton

Reproduced from Econbrowser




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Leave a comment
  • Anonymous on June 10 2011 said:
    Thanks James, but where OPEC is concerned, I've got all the answers I need. I gave a lecture in Paris not too long ago in which I insisted that OPEC got the message about 1999, when the oil price went into the can.They chilled out though until about 2004-05, when they started doing what good cartels should do, and as far as I am concerned, they are still doing it. As you point out, it doesn't make any sense at all to be concerned with what they say. Given what they intend to do, there is only one action that is logical for them, and that is to produce as little oil as possible.Occasionally I tell myself that I am a fly on the wall in the OPEC executive suite in wonderful Vienna. What I hear them talking about is, among other things, not damaging the goose that lays the golden eggs, and so they are not anxious to see a situation referred to in your work, where an escalating oil price is ruinous for the global economy.

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