AS DIAMOND producer De Beers discovered, maintaining a cartel and keeping control over prices by manipulating supply is no easy feat, especially when other producers enter the market. And it becomes nigh on impossible when demand is out of your hands.
In the case of De Beers, the cartel was kept intact for more than a century because the company not only went to great lengths to protect its monopoly over supply — including maintaining a diamond stockpile worth billions and negotiating directly with governments to secure their entire national output — but was also extraordinarily successful in influencing demand through disciplined marketing and creative advertising.
But even that well-oiled mechanism eventually broke down, so it is no surprise that the Organisation of Petroleum Exporting Countries (Opec) cartel has not managed to maintain the influence over crude prices it enjoyed during the ’70s and ’80s. Not only has it never had the ability to stimulate demand — fuel consumption is relatively price inelastic, and advertising campaigns for crude oil would be a waste of money — but the cartel’s grip on production has slipped over the years as existing reserves ran down and new technologies emerged bringing with them new sources of supply.
Prices that had been pushed to record levels at the turn of the millennium by a combination of robust demand led by China’s extraordinary growth and supply fears due to instability in the Arab world, plummeted in the wake of the 2008 financial crisis, global economic slowdown and advent of hydraulic fracturing techniques. After trying, and failing, to prop up prices by cutting production earlier this year.
Opec opted for a new strategy to reduce supply: force down prices in the short term to drive high-cost producers out of the market.
Trouble is, it has not worked, at least not yet. Fracking technologies have become more efficient, so US shale-bed production continues apace, even as oil price futures settle below the $50 a barrel mark. And with Iranian oil due to come back on to an already oversupplied market, Opec’s strategy — and Saudi Arabia’s record production of 10.6-million barrels per day — is starting to appear ill-advised.
Picture: REUTERS
AS DIAMOND producer De Beers discovered, maintaining a cartel and keeping control over prices by manipulating supply is no easy feat, especially when other producers enter the market. And it becomes nigh on impossible when demand is out of your hands.
In the case of De Beers, the cartel was kept intact for more than a century because the company not only went to great lengths to protect its monopoly over supply — including maintaining a diamond stockpile worth billions and negotiating directly with governments to secure their entire national output — but was also extraordinarily successful in influencing demand through disciplined marketing and creative advertising.
But even that well-oiled mechanism eventually broke down, so it is no surprise that the Organisation of Petroleum Exporting Countries (Opec) cartel has not managed to maintain the influence over crude prices it enjoyed during the ’70s and ’80s. Not only has it never had the ability to stimulate demand — fuel consumption is relatively price inelastic, and advertising campaigns for crude oil would be a waste of money — but the cartel’s grip on production has slipped over the years as existing reserves ran down and new technologies emerged bringing with them new sources of supply.
Prices that had been pushed to record levels at the turn of the millennium by a combination of robust demand led by China’s extraordinary growth and supply fears due to instability in the Arab world, plummeted in the wake of the 2008 financial crisis, global economic slowdown and advent of hydraulic fracturing techniques. After trying, and failing, to prop up prices by cutting production earlier this year.
Opec opted for a new strategy to reduce supply: force down prices in the short term to drive high-cost producers out of the market.
Trouble is, it has not worked, at least not yet. Fracking technologies have become more efficient, so US shale-bed production continues apace, even as oil price futures settle below the $50 a barrel mark. And with Iranian oil due to come back on to an already oversupplied market, Opec’s strategy — and Saudi Arabia’s record production of 10.6-million barrels per day — is starting to appear ill-advised.
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