Friday, December 4, 2015
Free for All
It was probably anticipated that during OPEC's meeting in Vienna today that they would decide to keep on pumping out oil. However, few probably anticipated that this would be an individual effort. At their chaotic meeting today the members decided to toss aside the idea limiting production to control prices. Instead, the organization decided to not work as a cartel and instead make the oil market an every man for himself competition. The result of this will be that countries will pump immense amounts of money as long as they can still turn a profit. The leaders in this will be the countries who can produce with the lowest costs, mainly the Saudis. Their goal will be to produce as much as possible as fast as possible in order to push rivals out of the market and gain market share. They will most likely push Russia and U.S. shale producers who require higher margins to stay profitable out of the market. It has been said that "OPEC is dead." Since the countries within OPEC account for roughly 40% of the world's oil production, there will be extreme repercussions of limitless production. What do you think will happen to the global economy? Clearly companies like EOG and Exxon won't be able to compete. Do you think the U.S. will have to push for some sort of agreement?
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5 comments:
This is a very, very interesting scenario in the oil market. For the US, if OPEC does increase production, gas price will keep getting low in the American market. Smaller US oil companies will surely be hurt and might go out of market. The only winners from this scenario, in my opinion, are the average consumers. After all, who wouldn't be happy fueling their vehicles with gas prices close to a dollar or so? I also feel lower gas prices will not be an incentive for consumers to switch to hybrid and 'greener' cars. If that is the case, carbon emissions and environmental pollution issues will be of great concern.
I agree with Md that consumers will benefit from this greatly and green initiatives will be hurt because of the low oil prices. In addition, I think if U.S. oil companies want to survive they are obviously going to have to do something to lower prices lower than OPEC. They have to work as efficiently as possible, cut costs, and extract as much oil as possible to compete with the Saudi Arabian countries.
In addition to what has been said, I feel that it will be hard for the U.S firms to compete with the Saudi oil companies, mainly because of production costs, labor rates, etc. That being said, a few benefits will arise because of these low oil prices and that has to do with higher purchases of domestic cars, and ultimately more money in the pockets of the consumers. We have already seen the shift in the purchasing of more expensive, less fuel efficient American cars as of recent. It will be interesting to see what happens moving forward, and ultimately whether or not the U.S will be able to compete.
Agreeing with the first comment by Md Akram that this situation does give rise to a pretty peculiar situation for the United states in terms of the oil market. There is the strong element of smaller companies going out of business due to a rise in production. However; the fact that the average consumer might be inclined towards less efficient automobiles is a possibility but not necessarily true.
How does "every man for themselves" create a cartel as opposed to just normal market competition?
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