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OPEC Tightens Taps to Shore Up Oil Prices

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OPEC Tightens Taps to Shore Up Oil Prices

Business

OPEC Tightens Taps to Shore Up Oil Prices

OPEC Tightens Taps to Shore Up Oil Prices

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  • <iframe src="https://www.npr.org/player/embed/6386589/6386590" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Although Exxon Mobil Corp. announced profits of more than $10 billion for the second quarter, the price of oil has been dropping. OPEC is looking to shore up a price that has fallen from a $78 high in July to around $61. But the cartel's power is only as strong as its members' resolve to stick to production quotas.

SUSAN STAMBERG, host:

Oil giants BP, Exxon Mobil, Royal Dutch, Shell and others are reporting earnings this week. Oil profits could be smaller in coming months, since crude oil prices have tumbled more than 20 percent from their midsummer peak. OPEC is hoping to shore up prices by pumping less oil next month, but not all of its members are guaranteed to go along.

NPR's Scott Horsley reports.

SCOTT HORSLEY: Whether it's steel a hundreds years ago, or crude oil today, the goal of any cartel is the same: make more money by selling less. Economist Vincent Crawford of the University of California, San Diego says by collectively holding out for higher prices, instead of duking it out with discounts, cartel members can earn higher profits as a group.

Professor VINCENT CRAWFORD (University of California, San Diego): In the 19th century U.S., which are the sort of classic examples of cartels, and we have like, things like the steel industry and the railroad industry and Judge Gary's dinners, where they got together every Sunday night and said, you know, what shall the price of steel be?

HORSLEY: Imagine yourself back in 1907 at the Waldorf Astoria in New York. At the head of the table is Judge Elbert Gary, the chairman of U.S. Steel. He and dozens of other steel bosses agree to keep prices artificially high. But as Crawford warns, promises made at a cartel dinner table often break.

Professor CRAWFORD: The key thing in the cartel is any kind of agreement creates a kind of a short run temptation to cheat.

HORSLEY: For years, Venezuela was one of OPEC's biggest cheaters, pumping more oil than the cartel wanted. Former Assistant Energy Secretary David Goldwin thinks this time Venezuela will play by OPEC's rules. Its state-owned oil company is unable to pump much more oil, and Venezuela badly needs high prices to fund the ambitious programs of President Hugo Chavez.

Mr. DAVID GOLDWIN (Former Assistant Energy Secretary): Venezuela had the most to gain from stabilizing prices. I think Venezuela will step forward and enforce those cuts, unless everybody else decides to cheat, in which case they'll bail out as well.

HORSLEY: Many traders expect widespread cheating, but Iran and the United Arab Emirates have already promised to tighten their oil taps. When OPEC held its own version of a Gary dinner last week in Doha, Qatar, Saudi Arabia agreed to cut its daily production by 380,000 barrels. Goldwin says the Saudis want prices that are neither too low nor too high.

Mr. GOLDWIN: If the market can be stabilized at a reasonable level, it will keep the members of OPEC happy, but it will also deter the move by a lot of the consuming countries to cut consumption and increase fuel efficiency.

HORSLEY: Some important players were not at the Doha dinner table, including consumers, non-OPEC producers, and investors. Analyst Philip Verleger says investors have helped drive up the price of oil and encouraged stockpiling. Big stockpiles worry OPEC, since every barrel in storage means a little less leverage for the cartel.

Mr. PHILIP VERLEGER (Energy Analyst): It used to be they only had to worry about consumers, oil buyers and traders. Now they have to worry about these investors, who have a great deal more money and are perfectly willing to throw it around.

HORSLEY: Stockpiles shrank last week by more than three million barrels. Just as stockpiles serve as a buffer against supply shocks, so in a way does the oil that OPEC leaves in the ground. The oil that Saudi Arabia isn't pumping today, for example, represents additional oil that it could pump tomorrow. Goldwin finds that oddly reassuring for a market that until recently had very little slack.

Scott Horsley, NPR News.

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