Some OPEC Members Cheating on Quotas

One problem the Organization of Petroleum Exporting Countries (OPEC) has had since its founding is ensuring that members abide by their quota agreements. To some degree, keeping member states in line resembles nothing so much as herding cats.

At its December 2009 meeting, according to Reuters, OPEC ministers issued a confidential document suggesting that if members continue to produce at November 2009 levels, crude stocks will increase by 800,000 barrels/day in the first quarter of 2010, and by double that in the second quarter.

The cartel’s nominal production ceiling is just less than 25 million barrels/day. In November, the 11 members subject to quotas (not including Iraq) produced 26.63 million barrels/day, nearly 1.8 million more than the ceiling. OPEC wants to maintain its price by lowering crude stockpiles in developed countries. Current stocks stand at about 2.74 billion barrels, and could grow to 2.85 billion barrels if OPEC members continue to produce at November’s pace.

The cartel’s problem is that member nations have to answer for immediate public needs as well as keeping an eye on longer-term considerations. Middle Eastern members have a demographic problem: their populations are young and unemployment is high among that group. This combination can, and often does, lead to civic unrest or outright regime change.

Venezuela and Nigeria rarely comply with quota agreements because both need to produce as much crude as they can to keep their national economies afloat. Cutting production is equal to cutting their own throats.

Another significant problem for OPEC is Russia, which has refused to join the cartel since its creation in the 1970s. Russia is the second-largest producer of crude in the world, and it always behaves the same way when OPEC installs quotas — it pumps more crude.

As crude becomes scarcer though, it is reasonable to expect OPEC members may change their behavior because the calculus leads to the conclusion that prices can only go higher in the long run. Unfortunately for OPEC, short-term needs still outweigh long-term thinking among some members. That won’t change soon.

Paul Ausick