Does the oil market need a swing producer? Does it need OPEC, Saudi Arabia, the Gulf states, or any combination of oil-producing countries that change production to manage the oil market?
History reveals that while oil prices have experienced several periods of high volatility, stability was achieved only when the market was managed in one way or the other.
Extreme volatility hurts producers and consumers
The oil industry, just like any other extractive industry, is capital intensive; while operating costs are relatively small, most of its costs are sunk costs. In case of a downturn and sharp decline in oil prices, producers focus on their operating costs. They continue producing – despite large losses.
High oil price volatility hurts consumers too. It reduces global economic growth, which is vital to job creation. The result is cut throat competition, a waste of the world’s scarce resources, higher costs, and a deterioration of efficiencies in oil production and consumption.
Historical evidence abounds; since the broad commercialisation of the oil industry in 1859, the cost of high price volatility has been considerable for producers and consumers. Both have desired to reduce or eliminate volatility and achieve some sort of price stability in the oil market.
The objective of market management: Historical evidence
It was the discovery of a process to extract kerosene from crude oil that made oil commercially valuable in 1859. Oil prices were extremely volatile until John Rockefeller’s Standard Oil brought order to the industry, stabilised the market, reduced wastage, decreased costs, and improved production efficiency. These benefits were the result of market management.
Policymakers thought Rockefeller’s monopoly was too strong. They used antitrust laws to break up Standard Oil into more than 30 companies…