Oil under $40 — OPEC’s Prisoner’s Dilemma

Bloomberg reports that oil has fallen 73% since just July(!) and traded under $40 a barrel, after OPEC announced a cut of 2.5 million bpd:

The Organization of Petroleum Exporting Countries agreed that the group’s 11 members with quotas will trim current production by 2.46 million barrels a day…Crude oil for January delivery declined $3.54, or 8.1 percent, to $40.06 a barrel at 2:47 p.m. on the New York Mercantile Exchange, the lowest settlement since July 13, 2004. Futures touched $39.88 during trading today. Prices have tumbled 73 percent from a record $147.27 on July 11.

Why was there no response to such a big production cut? It appears to be because the OPEC members cheat. WSJ:

OPEC’s effective spare production capacity stands at 3.3 million barrels a day, the highest since 2006, as the group cuts output to halt the fall in oil prices. The group has so far reduced production by just 825,000 barrels a day, or 55%, of the 1.5 million barrels a day members agreed to cut in October.

The market apparently does not believe the new cuts either. Why? It’s OPEC’s Prisoner’s Dilemma.

One Response to “Oil under $40 — OPEC’s Prisoner’s Dilemma”

  1. Price of Gas « I Think ^(Link) Therefore I Err Says:

    […] OPEC members cheat. OPEC’s effective spare production capacity stands at 3.3 million barrels a day, the highest since 2006, as the group cuts output to halt the fall in oil prices. The group has so far reduced production by just 825,000 barrels a day, or 55%, of the 1.5 million barrels a day members agreed to cut in October. […]

Leave a Reply