If you’ve been paying attention to the oil market lately, you’ve probably spent some time scratching your head. Crude oil prices seem to fluctuate on a day-to-day basis now, leaving investors to wonder when the volatility will end – and what’s behind it.
Saudi Arabia, the world’s leading oil exporter, has been flip-flopping on its price target for crude – one minute saying it wants prices to stabilize at $50 per barrel and then turning around and announcing production cuts. So what do the Saudis really want, and - perhaps more importantly - do they still have the influence within OPEC to get it? Jerry Taylor, a senior fellow at the Cato Institute, says despite all the confusion in the market, figuring the Saudis out is simple: they want to sell oil at its highest price. OPEC as a whole is in the business of maximizing revenues, Taylor says. It might sound counterintuitive, but it could mean a production cut one day and an increase the next – and it mostly depends on external forces, Taylor says, but it all comes back to how to expand that bottom line.
But that notion of the almighty OPEC turning the big oil spigot on a whim is inaccurate. Despite popular opinion, OPEC has never been able to unilaterally determine the price of oil; instead it takes advantage of outside events like weather, war, strikes or any other matter that could affect the supply and demand cycle. Taylor says the oil cartel merely accelerates price run-ups and declines based on these external factors.
He notes that OPEC first tried to defend a $60 price floor for crude and now that’s turned into a $50 price floor. The fact is, even with all its power, no member of OPEC nor the cartel itself can set oil at a price the market won’t be able to bear (although it’s power is still unparalleled – yesterday the cartel announced production cuts and today crude oil is trading above $57).
And Saudi Arabia’s role as the world’s largest oil exporter (accounting for roughly a third of OPEC’s output) is still plenty influential, Taylor says. Some will remember the Saudi-initiated production cutbacks of the late 1970’s and early 80’s that caused oil to spike to the then-astonishing $34 per barrel in 1981. In fact, the Saudis were the only members to implement OPEC’s most recent set of cutbacks, Taylor says. And they surely aren’t happy about it. If, one day, they decided to flood the market to punish OPEC’s other members for not cutting back production, Taylor says, that could reaffirm the Saudis’ influence – although it certainly wouldn’t help stabilize the oil market.