Biden loses ground on OPEC+ ‘cuts’

President Joe Biden needs to know more.

First, he should read a biography of Theodore Roosevelt. Roosevelt practiced quiet diplomacy while carrying a big stick for last minute persuasion. Biden should also take a look at Principles of Economics by Harvard Professor N. Gregory Mankiw. The professor explains that economic cartels such as OPEC rarely succeed in achieving their goal of raising prices through a production cut agreement. Cartel members cheat.

OPEC HUMILIATES BIDEN ONCE AGAIN

Such reading is relevant given OPEC’s agreement on Wednesday to cut 2 million barrels per day of oil production quotas among its members. However, OPEC is a loose oligopoly with over 20 members. Only two of these members really matter. These being Saudi Arabia and the United Arab Emirates, the United Arab Emirates. Only these two OPEC countries have significant excess capacity and are politically stable. Russia, which is not part of OPEC, participates as part of the OPEC+ deliberations. That said, Russia still cheats by keeping production at higher than agreed levels. Importantly, Saudi Arabia and the United Arab Emirates are economic and political rivals. Diplomatic relations between the two countries are fragile.

Given the rivalry, the temptation to cheat is great. As Mankiw explains in his manual, in an economic cartel, “the greatest gains will go to the party that cheats first on any deal, so any deal is very fragile.”

Simply put, this new deal is hot air. Historically, OPEC deals always fail. Saudi Arabia is usually the last to cheat, it becomes the swing producer. Saudi Arabia is losing revenue. Saudis know about oil and the history of oil production deals. They will talk about cuts but nothing more. In a few weeks, the political hysteria will die down and oil prices will reflect supply and demand fundamentals.

You do not believe me ?

Take a study of the United States by Helen Metz. Writing about Saudi oil policy in the 1980s, Metz observed that “Saudi Arabia’s adherence to an official price system … made the kingdom the booster producer. Saudi Arabia has been forced to reduce production to ever lower levels. By 1979-80, Saudi Arabia had peaked at production of over 10 million bpd; in 1986, this quantity had reached a low point of 3 million bpd.

The Biden administration knows the latest deal is making a lot of noise for nothing. So why is the administration raising the political temperature in the Middle East and bringing Saudi Arabia closer to Russia and, for that matter, China as well?

It’s all about the midterm elections. The Biden administration wants to discourage oil production and consumption in the United States, but the administration also wants gasoline prices low. Therefore, the administration encourages oil production abroad to maintain domestic gasoline supply and prices, but discourages domestic production to satisfy “green” fanatics. The whole world is a stage, and we Americans are just played for fools.

But it’s worse than that. After all, by making a fleeting production cut a big deal, the Biden administration has increased uncertainty in the oil market. Markets hate uncertainty. Biden’s short fuse drives up oil and gasoline prices. He shouts but the Saudis do not listen. And Biden has no obvious stick.

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James Rogan is a former US foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and economics, politics, sociology and criminal justice.

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