Economist Article Relevant to Topic 1

Hi again Delegates!

I hope you had a relaxing and fun holiday season!  I have attached an article by the Economist that talks a little bit about the dynamics behind OPEC and what was current news as of 2006.  It is pretty interesting and relevant to our committee, especially Topic 1.  Please take a look at it and think about the different perspectives presented and how they might influence the organization and our committee.  As always, feel free to reach us with any questions you might have.

Oil

The little cartel that could

OPEC agrees its first production cut since 2008

Oct 1st 2016

DOES OPEC matter? Those who dismiss the significance of the Organisation of Petroleum Exporting Countries, a producers’ cartel, cite at least three reasons to think not. Its 14 members cannot agree among themselves, not least because they include bitter regional rivals like Iran and Saudi Arabia. Even if the cartel could agree, its pacts would not work, because so much crude oil is now produced outside the club, in the hinterlands of Siberia or the fracking fields of America. And if OPEC’s agreements will not work, its members will have no reason to stick to them.

Those who think OPEC still matters can now make one powerful counterargument: Algiers 2016. On September 28th OPEC members gathered there for an informal meeting and agreed to cut output for the first time since 2008. The agreed cut was modest, limiting production to 32.5m-33m barrels per day, which is between 0.7% and 2.2% below current output. Saudi Arabia’s production was likely to fall anyway as the winter approaches. The agreement was also vague. Members will wait until their formal meeting in November to settle how the overall cut will be distributed among them. Nonetheless, within hours of the report, the price of oil rose by over 5% (before easing somewhat). To the question does OPEC still matter, the market had given its own emphatic answer.

Even OPEC-doubters will take note of what the agreement says about Saudi Arabia. The kingdom had insisted that it would cut output only if other producers followed suit. This insistence that OPEC cut as one or not at all brought it into direct conflict with other members like Iran. After EU sanctions were lifted earlier this year, Iran has been set on ramping its oil production as fast as possible. The Algiers agreement became possible only because Iran seems to have won this argument. It would be allowed to produce “at maximum levels that make sense”, said Saudi Arabia’s energy minister—a softer Saudi attitude that may reflect harder constraints at home. Low oil prices left the kingdom with a budget deficit of 15% of GDP last year.

But will the agreement work? It has already moved the oil price. But then, one might argue, what doesn’t? The oil markets have been unusually volatile this year, as they struggle to find their bearings in a new landscape, marked by slower global growth, resilient shale producers and the return of Iran. Amid great uncertainty about these changed fundamentals, commodity traders can lapse into second-guessing each other. Even if every trader suspects that OPEC in fact no longer does matter, OPEC will remain powerful until everyone knows everyone else agrees.