One thing I don't understand is, why is it favorable for OPEC not to cut supply? Is it they want to crush all non OPEC based producers? Or are their buyers forced to buy at a particular price so they don't care if they keep producing?
It's a much more complicated prisoner's dilemma.
Many of the oil producing countries are nearly entirely reliant on oil sales for their economies and national budgets. Something like, yes, you could optimize month to month prices with high cooperation cutting equitable amounts. But.
For some states it's like agreeing to starvation, no matter what they do prices are too low to pay the bills. Many of them only maintain their power because of oil money. And for some, losing money now means they can bankrupt or seriously disrupt their competition meaning they will make more money over a longer period.
So if you're starving there's a strong motivation do cheat. Everybody else cuts production, prices go up, and you sell everything you can to take advantage.
And remember we're talking about price fixing cartels here. Illegal in much of the world. Opec cuts would mean North American profits, because we obviously don't participate.
It is, as the author writes, now much more likely for some of these oil states to fail completely. Revolutions, civil wars, regional wars. States which had leverage over the US because of oil are seeing that evaporate with this oversupply and price crash.
And longer term, but not that far out is both some of these countries running out of oil and oil demand worldwide tending much much much lower as oil is phased out as an energy source. These oil countries see the impending permanent decline in oil demand and the immediate future is their chance to extract as much as they can out of their natural resource which each year will become less valuable and less relevant.
(This is related to why haven’t wells shut down in response to the drop in price, as opposed to simply producing less oil from existing wells.)
https://arstechnica.com/science/2020/05/heres-why-the-world-...
This was all just before the Pandemic hit.
The oil is still there, they ability to extract it exists... so company A goes out of business, but once the countries tire of shooting themselves in the foot and prices rise, Company B will just extract it.
At best they spite company A, but didn't change much.... maybe they make a few bucks while company B ramps up.
And that all assumes other nations play along... that is not common.
I grew up in an area where oil had been found decades ago. There was mini oil rush and then ... it was discovered to be not as accessible as initially thought. Suddenly the rush was over.
It was a very fast boom and bust.
For a good 20 years I saw bumper stickers that said something like "Please God give us another chance, we won't screw it up this time." It was a very midwestern sort of self blame for a thing that wasn't anyone's fault.
Decades later... they got their shot again and the boom lasted quite a bit longer, until recently.
Once prices rise again it becomes profitable to extract again....and all Russia got were their own losses... and if other nations don't play along, maybe more losses.
Ultimately Russia can't stop the US from having a supply of oil anymore than the US can stop Russia.
On top of that, the Covid19 happened.
Some theorized that SA and Russian pumping more oil was a plan to kill USA's fracking and shale industry. I'm just hoping it'll force us to move toward renewable so we won't be dependent on these countries.
Saudi Arabia has been producing around 10.5 million barrels per day fairly consistently-ish for the last 5 years. If anything it's a bit lower over the past 12 months vs the 60 month average: https://ycharts.com/indicators/saudi_arabia_crude_oil_produc... So that theory is right out, imo.
Russia has increased production only 7-8% in the last 5 years. https://ycharts.com/indicators/russia_crude_oil_production
USA has increased production 54% since the beginning of 2016. https://www.macrotrends.net/2562/us-crude-oil-production-his...
I'd investigate what you're reading that gave you the impression that Russia and SA increased production drastically in order to tank USA. It's likely the sources are providing misinformation.
https://en.m.wikipedia.org/wiki/2020_Russia–Saudi_Arabia_oil...
https://www.eia.gov/opendata/qb.php?category=1039874&sdid=ST...
Production for the month of March is published and does not show a significant increase. Again, its likely that the sources you follow are providing misinformation - not just about this, but about other things as well.
More generally, I follow oil news quite closely (as I work in the sector, and I have worked in Saudi Arabia specifically). These types of claims are "widely report in the media" constantly every year, although it is interesting that there's a Wikipedia page about this year's events. I personally wouldn't trust that version of events, as it only narrates changes in price without addressing movements of the supply/demand curve. I consider volumes of supply and demand to be more narrative for fungible commodities than statements of price alone.
As all these price movements happened after China's enormous quarantine and reduction in road traffic in February, I'd posit that the falling prices are a result of concrete reduced demand, rather than hand-wavey price adjustments.
Saudi can't adjust price lower globally single-handedly, the next marginal sales will happen at the market price. This wikipedia article doesn't seem to see that. The only way Saudi can reduce the price for its competitors is by supplying more oil to the global market.
https://www.wsj.com/articles/oil-price-war-batters-poorer-op...
This is all so recent that it’s entirely possible they have reversed course already, absolutely. However this isn’t some wacko conspiracy theory, it’s based on the explicit statements of these countries governments all over the mainstream media.
Basically, OPEC needs a situation where they can reduce supply by 10% and get more than 10% increase in price. Otherwise they may increase the price, but still lose revenue overall. Over the past two decades they've tried this many times, but it hasn't worked. Russia and the US always increase production enough in response to keep the rise in prices relatively low.
As oil is generally an inelastic commodity, they may be able to reduce their production by something appalling, like 2/3rds reduction. Then they would need, and probably actually get, a global oil price 3 times what it was previously in order to maintain revenue. However, previously that meant an oil price of $180-300/bbl which would in turn cause a global recession and reduce demand. Even if oil is very inelastic, at some point people would stop driving/flying/using energy.
So really, there was no longer any way for OPEC to function as a cartel. The US effectively broke the cartel when it succeeded at being the new "swing producer" able to ramp up and down production in <6 months to meet global needs. This was all due to fracking and horizontal drilling.
OPEC has been trying to work with Russia to establish a new "OPEC+" that might control enough market, but it's incredibly difficult to keep all players honest. And impossible in a coronavirus market where demand is down so much (no one is flying even with nearly free oil).
Lastly, the US is starting to consider joining OPEC+. It's not something I previously thought was possible, because there's not one national petroleum company in the USA to negotiate with, there's thousands or tens of thousands of oil companies to negotiate with (some are just mom+pop oil companies which own two wells on an old plot in Pennsylvania, for example).
However, just as we sometimes pay farmers not to farm, or pay dairy farmers not to produce milk, we are considering paying oil companies to leave oil in the ground: https://thehill.com/policy/energy-environment/493187-trump-a...
This would effectively be the US joining OPEC+ to artificially prop up the price of oil (and thus, subsidize the government budgets of Russia, Iran, Saudi Arabia, and other oil producing nations with American consumer's wallets). It does not seem to be a policy in serious contention, however. I don't expect the USA to follow through on these ideas.
That would only be true if you had a zero cost of production (and OK in Saudi Arabia's case, they nearly do). A decrease in volume decreases both your costs and revenue, but an increase in price goes all to revenue.
So if, for example, at the current oil price you had a margin of 25% (eg. $15/barrel cost of production and $20/barrel price), you only need a 2.8% increase in price to balance a 10% drop in volume. Even SA's ~$5 production & transport costs still means an 8.3% increase in price balances a 10% drop in volume.
As a result they increased supply to fight back and hurt Russia’s export.
At least that was the story I read a few weeks ago when this went down.