Oil prices have surged over 10% since OPEC announced a deal to "cut" oil production. We'll get to the complete nonsense of it all below. For the record, the 14-member country oil cartel controls one-third of global oil production and sits on 80% of global crude reserves. So, it wasn't surprising that the mainstream media heralded yesterday's announcement as a "landmark deal to reduce oil output."
Here's the Wall Street Journal's summation:
"OPEC representatives reached a landmark deal to reduce oil output, propelling crude prices more than 8% after months of wrangling and market uncertainty about the ability of the once-mighty group to strike an agreement. The Organization of the Petroleum Exporting Countries said Wednesday that it would cut production by 1.2 million barrels a day from 33.6 million barrels and said it expects producers from outside the group, including Russia, to join with additional cuts totaling 600,000 barrels a day."
Hang on a second. Time for a reality check.
OPEC has had virtually no impact on how much oil its members produce. While it sets quotas, its member countries cheated about 96% of the time from 1982 to 2009. That's according to a study by Brown University professor Jeff Colgan.
Our Senior Energy Policy analyst Joe McMonigle adds:
“Even OPEC assumes cheating, which is why they established a compliance committee (although it's toothless).”
In addition, yesterday's deal to cut oil production relies heavily on Russian involvement. The country's energy ministry has already said it would "gradually" work up to the deal cuts, as McMonigle pointed out yesterday. In other words, "the deal is already on shaky ground," he says.
Back to Colgan's OPEC study. Here are a few of the more interesting findings:
- OPEC announcements have an ability to move spot prices for 15 to 20 days. but there is exactly zero evidence OPEC is actually restricting output during this time
- On average, over this 1982 to 2009 period, the nine principal members produced on average 10% more oil than their quotas supposedly allowed
- The relationship between oil prices and OPEC quotas is virtually uncorrelated (r^2= 0.15)
- All but two members over-produced in more than 80% of the months during this period. The exceptions were Iran and Venezuela, which still cheated over 70% of the time
- There were 22 OPEC meetings in that same period in which quotas were increased, and in 21 cases, the new aggregate quota for the 9 principal member was lower than what those countries were producing a month prior to the change
Bottom Line
This OPEC "deal" pays lip service to a cut in oil production. History strongly suggests this is yet another toothless OPEC commitment that won't be honored.
