OPEC and the oil price
OPEC's problem is not power. It is that every member has an incentive to cheat on the quota they just agreed.
Understand why a statement from a meeting moves the price more than an actual shortage.
How OPEC and the oil price works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The basket is an average, and you are not average
If you rent in a city and drive to work, your personal inflation rate in a year of surging rents and fuel can be double the headline. The number is not lying. It simply is not about you.
- 1
Supply here is deliberate, not discovered
Most commodities have diffuse, competitive supply. Oil has a group that meets and decides how much to produce. That makes the oil price partly an administered price, and it is why the market hangs on the communiqué.
- 2
The cartel's weakness is arithmetic
Every member benefits if everyone else cuts production and they do not. Cheating is individually rational and collectively ruinous, which is why quota discipline is the perennial question and why the price often falls after an agreement that markets do not believe.
This is a prisoner's dilemma, and it is why cartels are chronically unstable even when they are powerful.
- 3
Shale changed the ceiling
US shale can be turned on relatively quickly when prices rise, which caps how high OPEC can push the price before it invites competing supply. The cartel now sets a floor far more effectively than it sets a ceiling.
You can explain why the oil price sometimes falls on an announced production cut.
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OPEC's problem is not power. It is that every member has an incentive to cheat on the quota they just agreed.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.