Environmental Engineering Reference
In-Depth Information
All of this has a big upshot for the potential consequences of higher
U.S. oil production. As U.S. oil output rises, prices are inclined to fall.
h at's bad news for oil-exporting countries. In response, some of those
countries will tend to try and cut back their own supplies, aiming to
neutralize the U.S. boom and prop up prices. h is dynamic has the
potential to deeply undermine the impact of increased U.S. production
on prices. If, for example, a i ve-million-barrel-a-day increase in U.S.
crude output was met with a four-million-barrel-a-day cut in supplies
from other countries, the net impact on prices would be slashed by a
factor of i ve.
h ere is, however, one other tantalizing possibility—and it could
mean deeper price cuts rather than smaller ones. Big-enough gains
in global oil production could spark a bat le among OPEC members
and other big producers for market share, leading to a crash in world
prices.
To see how this could happen, imagine you're a strategist for a major
member of OPEC, perhaps Saudi Arabia, the United Arab Emirates, or
Iraq. Oil production outside the cartel is surging; not only is U.S. pro-
duction on the rise but so is output from Brazil, Canada, and beyond.
You're worried about falling prices but don't want to sell less oil. What
you'd like most is for others to curb their production; that would keep
prices high and spare you the need to throt le back your own output.
Everyone else, of course, feels the same way, making this particular out-
come unlikely. Your next-best bet is to share the burden of restraint
with your fellow cartel members (and perhaps a few others). As new
production rises, though, the burden increases too—and although it
might be easy to divvy up some minor cutbacks, it's a lot harder to
share a smaller pie. At some point, discipline breaks down. You lose
faith that others will curb their output; in fact, you fear that if you dial
back your own production, other members will just raise theirs and
steal your customers. Even worse, with falling prices you have trouble
meeting your country's budget. So you turn to a i nal option: you crank
up production in an at empt to sell more oil. h e only problem is that
several other countries have made similar decisions. Collectively, you
l ood the market. Prices plummet.
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