For all practical purposes, OPEC committed suicide.
The announcement looked to be a concession by OPEC that it can’t influence let along control the market and has no say over the output of members who just do whatever they want after each OPEC meeting.
As of November, according to estimates from Platts, a leading industry newsletter, all of OPEC’s members were pumping over quota except for Angola, which was a hair under its quota, and Libya, which is just cranking up production after its halt during its civil war.
The quota for 11 OPEC members—Iraq is not part of the quota system—for the last three years has been 24.845 million barrels a day. Actual production last month was estimated by Platts at 27.35 million without Iraq and at 30.05 million barrels a day including Iraq.
After its one-day meeting last Wednesday, OPEC put out a statement saying, “The conference decided to maintain the current production of 30.0 million barrels per day, including production from Libya.” The statement did not say if that figure now included Iraq, but given that current production is 30 million only if Iraq is included, it would appear OPEC was including Iraq. However, in keeping with its preference for vagueness, OPEC avoided making that point clear.
Assuming Iraq was included, the increase from the old quota would be a substantial 12 percent. If Iraq were not included, then the increase would amount to a whopping hike of 21 percent from the quota that has been on paper—but never adhered to—for the last three years.
The latest OPEC decision represented a rejection for hawks Iran and Venezuela, which went into the meeting publicly seeking to have quotas lowered to prop up prices. But the argument that prices needed to be propped up was viewed as weak given that the 2011 average price of an OPEC barrel is higher than any year before.
OPEC has long been irrelevant. Oddly, when OPEC has boosted quotas to try to lower prices, prices have sometimes still gone up, while when it has lowered quotas to try to boost prices, prices have often continued downward.
This time, however, the price of an OPEC barrel fell $4 or 3.8 percent from last Tuesday, the day before OPEC met, through Friday, two days after the OPEC meeting. Most analysts attributed that more to European financial problems than OPEC’s stand.
The OPEC statement contained one other “substantive” policy pronouncement. It said: “The conference also agreed that member countries would, if necessary, take steps—including voluntary downward adjustments of output—to ensure market balance and reasonable price levels.” That was little more than gibberish.
Stripped down to the basics, it meant each member could make its own judgment of what production it needed to pump for a price it viewed as a reasonable and a market it viewed as balanced. But the whole point of OPEC as a cartel for a half-century has been that the cartel makes those judgments on a unified basis. If each member now makes that judgment, there is no cartel beyond a paper organization.
Furthermore, OPEC did not announce any individual country quotas. It did not even say there were any non-published country quotas. The cartel has not announced country quotas for three years. Without them, there can be no pretence of any controls on output.
Venezuela and Iran both said they wanted the quota cut to assure continued high prices. But Fatih Birol, the chief economist for the International Energy Agency, the Paris-based grouping of major oil consumers, urged OPEC to keep production high in an effort to depress prices and help the global economy. He said oil at its current price poses “a major risk for the economic recovery worldwide.”