As oil prices decline, the Organization of Petroleum Exporting Countries has decided not to cut oil production.
OPEC’s production decision is not a new one. And the group of oil-producing nations could very well announce a cut in oil supply in the future if oil prices continue to fall. Either way, the price impact from OPEC’s decision would likely be marginal.
After all, oil is a globally traded commodity and its prices are affected by many factors. OPEC is undoubtedly a big player in that market, but the United States, Canada and other countries are becoming increasingly large players.
Newspapers and several pundits are hailing OPEC’s pronouncement as a fundamental shift in global oil markets. But it’s not. The reality is OPEC is not, nor was it ever, the market manipulator many perceive it to be.
OPEC is often labeled a cartel and the perception is that there are a small number of oil producers that can manipulate supply enough to affect the price and few substitutes exist. Yet OPEC does not necessarily act like a cartel, nor has it ever been particularly effective in restricting oil supplies.
In fact, OPEC is largely unable to restrict supplies and control oil prices because its members have a strong incentive to cheat and increase oil production above their quotas. As American University professor of international relations Jeff Colgan writes, “A cartel needs to set tough goals and meet them; OPEC sets easy goals and fails to meet even those.”