Black Gold

If you've been by a gas station recently you've probably noticed that gas prices aren't rising. In fact, they've been falling at a steady rate ever since they peaked after Hurricane Ike caused some damage to a few oil rigs off the Gulf Coast. The US, which happens to be the largest oil consumer in the world, has reduced their demand for oil dramatically. Consumption is now down to 18.6 million gallons a day. US consumption hasn't been that low in almost five years!

This is great news for a lot of consumers who were tired of paying high gas prices. However, it's hardly what OPEC, one of the biggest oil cartels in the world, wants to hear. As an oligopoly, OPEC meets and makes an agreement about the amount of oil to be sold to consumers. Then after the amount is established a price per barrel is set as the industry standard which allows each firm to gain more than normal profits from their transactions.

Sadly, these OPEC companies have been experiencing a lot of pressure to sell more oil because the price is falling so rapidly. An increased quantity would make up for the losses due to price. However, if any firms sales more than its regulated output the cartel falls apart and it's advantageous aspects deteriorate. This is one of the most basic economic principles of Oligopoly.

So, what's a cartel, like OPEC, to do in this situation? Reduce production, duh.

Today OPEC had an emergency meeting. At the conclusion, the cartel determined that they would reduce overall production by 1.5 million barrels of oil in an attempt to raise oil prices. While this is an excellent idea, OPEC should be weary of any reduction in production. Countries like Iran and Venezuela are desperate to make profits which means they may ignore the new quota in order to maintain their budgets. No matter what happens, I think we can all go ahead and assume that prices are going to stay this low for long.

If you'd like to read the article it can be found here.