OPEC, Evil Genius Cartel?

I was somewhat surprised to see this recently appear in a report on the future of energy published by HSBC. In a summary of that report just provided to me:

OPEC plays a tantalising game of making oil just about affordable and supply just about enough to make other energy sources expensive.

“Opec tries to manage oil prices to maximise revenue while at the same time keeping prices below the level that might encourage investment in long-term, unconventional supplies of liquid fuels (such as tar sands and biofuels) or promote efficiency improvements,” HSBC notes. “After all, some members have many years of reserves left and need to ensure that oil has a long-term role in the energy equation.”

Is OPEC that manipulative in deciding how to supply crude oil? I was very surprised to see an institution such as HSBC make this type of statement.

About Curzon

Lord George Nathaniel Curzon (1859 - 1925) entered the British House of Commons as a Conservative MP in 1886, where he served as undersecretary of India and Foreign Affairs. He was appointed Viceroy of India at the turn of the 20th century where he delineated the North West Frontier Province, ordered a military expedition to Tibet, and unsuccessfully tried to partition the province of Bengal during his six-year tenure. Curzon served as Leader of the House of Lords in Prime Minister Lloyd George's War Cabinet and became Foreign Secretary in January 1919, where his most famous act was the drawing of the Curzon Line between a new Polish state and Russia. His publications include Russia in Central Asia (1889) and Persia and the Persian Question (1892). In real life, "Curzon" is a US citizen from the East Coast who has been a financial analyst, freelance translator, and university professor; he is currently on assignment in Tokyo.
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9 Responses to OPEC, Evil Genius Cartel?

  1. Scott says:

    It sounds alot like what has been heard since the 73 embargo. I would who angered who on this one?

  2. I’d be surprised if they weren’t doing something like this. I mean, it only makes good business sense to “maximize revenue while at the same time keeping prices below the level that might encourage investment in long-term, unconventional supplies of liquid fuels.”

    I mean, most businesses want to make as much as they can – but only the idiot ones will to charge so much that their customers buy from somewhere else.

  3. L S Wong says:

    In principle, I have no issue with OPEC doing this. Trying to maximise profit from your resources is a basic economic imperative, and one in which that organisation has every right to pursue. If we in the West choose to continue to buy into this rather than biting the bullet and seriously invest/research in the alternatives for long term sustainability, then more the fool us!

  4. Alfred Russel Wallace says:

    Most analysts go further, and suggest it is Saudi Arabia who leads this manipulation. The big question is how long they can do it…… such manipulation requires excess extraction capacity, and many think Saudi Arabia has little surplus capacity left… We shall see.

  5. Charlie says:

    It’s no different to the way the diamond industry controls the release of diamonds onto the market.

  6. Roy Berman says:

    Isn’t that the fundamental purpose of OPEC? I don’t see anything about that report being remotely controversial, or even surprising.

  7. Robert Harrison says:

    Cartels are fascinating from an economic standpoint. They’re much more difficult to maintain than one might think because the profit motive pushed producers into breaking from agreed production quotas. Also, one of the most important factors in maintaining a cartel is that all of the producers in have similar production cost structures. In the case of OPEC, the opposite is the case. Saudi Arabia (who leads the cartel) has the lowest costs while Venezuela and Nigeria have among the highest and Iran somewhere in the middle (because of poor infrastructure, not geology). The result is that Saudi Arabia can tolerate much lower prices and still generate huge profits while other members cannot. Add to this the fact that Saudi Arabia and Iran hate each others guts and I wouldn’t be surprised if the Saudis tried to suppress oil prices to destabilized their hated Persian adversaries. Objectively speaking, OPEC is a very bad cartel.

    Charlie,
    I think that Debeers’ market power was broken in the late 90′s by the entry of the Russians and Canadians into supply side of that market.

  8. Myname says:

    Is OPEC that manipulative in deciding how to supply crude oil?

    I have to laugh at this kind of charming naivety on a blog about Realpolitik.
    It’s a cartel. What do you think it does?

  9. Curzon says:

    Myname, I get your point — but study of economics would show that a cartel can’t get it right. I’ve read up on OPEC’s history since writing this post and I still think HSBC is wrong. I always thought that OPEC was protecting their national interests as oil producers — and they have succeeded in that regard in getting much better deals from international oil companies. They have a much worse track record in stabilizing the price.