Friday, April 25, 2003

Games cartels play

OPEC is nervous about the impending return of Iraqi oil to the world marketplace. On Thursday, OPEC leaders (i.e. government oil ministers) decided to cut production by 2 million barrels per day. This move comes as oil prices have fallen to around $25 a barrel, down from a high of about $40 just two months ago. Not everyone thinks OPEC’s move will accomplish much:

"It's not enough to stop a supply glut," said Michael Rose, director of trading for Angus Jackson Inc. He said prices may fall well below OPEC's $25 target, depending on how fast Iraqi exports return.

Given the profits oil producers have raked in this year as the result of high prices, many analysts question whether the cartel will be disciplined enough to stick to its self-imposed limits.

"OPEC often says one thing and does another," Mr. Rose said. "I think they will have a hard time getting all members to actually cut. They have a history of cheating."
Cartels are notoriously unreliable, especially when they consist of government-run oil companies. This is a good lesson for antitrust enforcers: Cartel arrangements may cause consumers a temporary inconvenience via price increases, but ultimately selfish market incentives will lead the cartel to undermine itself.

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