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OPEC, Oil Production, and Environmentalism

By pharrell

OPEC's refusal to increase oil production over the past three years marks a sharp departure from the cartel's historical practice of regulating output to keep global prices within a "band" established by the cartel. Although the band strategy reduced short-term profits, it quite consciously promoted OPEC's longer-term domination of world oil markets--it discouraged oil exploration in high-cost, non-OPEC countries, it eliminated economic incentives to invest in alternative sources of energy, and reduced political pressure in western nations to free themselves of OPEC oil.

OPEC's departure from the band strategy may represent nothing more than what the cartel claims, that temporary global political pressures (the Iraq war, Chavez' management of Valenzuela) and speculative interest in oil futures have made it impossible to maintain the band in the present environment. But it is far more likely that the departure represents a fundamental re-evaluation of OPEC's long-term interest in light of the cartel's belief that environmental pressures--along with long-term political pressure to do less business with the Middle East--will inevitably drive western nations away from carbon-based economies, regardless of the price of oil. If OPEC thinks that oil as a commodity is on its way out of the global market, OPEC's long-term interest shifts from preventing competition to maximizing short-term profits that can be saved to provide for a post-carbon future, which certainly seems to be what the cartel's members are doing.

Full post as published by Harrell Blog on March 10, 2008 (boomark / email).