Don't Blame OPEC For Oil Prices

With the price of oil back above $75 a barrel, it'd be tempting to blame OPEC for squeezing prices.

Don't, argued James Hamilton, an economics professor at the University of California, San Diego, on his Econbrowser blog. The OPEC at fault argument rests on the fact that the cartel of oil producing countries cut member quotas last October and then again in December by a total of 1.7 million barrels a day. The actual decline in production achieved between October and April was just under 800,000 barrels a day. Hamilton's key argument, though, is that producing countries are looking to cut output, whatever the OPEC quotas. Normally, the incentive is always for cartel members to cheat. By and large, they haven't been. Why? Because producing countries see strong demand - take a look at how thirsty China's become with year on year GDP growth running at near 12% - not just now but well into the future. Recent reports from the International Energy Agency and the National Petroleum Council have driven up demand expectations for the coming years. Accompanying this rise in demand, however, are signs that major producers like Saudi Arabia and Kuwait are starting to worry about oil stocks. Trying to stretch out reserves for the next century or so means that they're cutting back production anyway, says Hamilton. So does self-restraint by producers against a backdrop of rising demand from consuming countries explain the dynamics of the oil market and support talk of prices hitting $100 a barrel over the near term? No, argues Simon Hayley, at Capital Economics, an independent consultancy. A considerable amount of the latest uptrend in crude prices has been driven by momentum trading. Speculative long positions on crude futures hit a new peak last week, Hayley noted in a research note out earlier this week. The move isn't only coming on the back of speculators - U.S. gasoline stocks are low and there are fears of another bad hurricane season. But with speculators holding such large positions, the risk of a sudden price move must be on the downside. Longer term, though, if Hamilton is right and OPEC members are less responsive to changes in quotas, the cartel's ability to curtail any fundamentally-driven changes to prices is likely to be curtailed. If, for instance, oil hits $90 a barrel and OPEC decides to raise its quotas, it could be that big producers like Kuwait and Saudi Arabia won't pump any more crude.