Question

1. Read the following paragraphs to answer the question Why cartels like OPEC fail to reach to consensus on price and quantity?

When markets were collapsing as the coronavirus pandemic crushed demand in March and early April, the idea that crude could rise again to $40 a barrel was “a dream,” the energy minister of the United Arab Emirates, HHSuhail Al Mazrouei said during a conference call on Monday. That was before the OPEC+ alliance agreed unprecedented cuts in output.

Prices could return to “normal” within a year or two as curbs approaching 10 million barrels a day drain excess barrels from the market, Mazrouei said during the call hosted by the Atlantic Council, a Washington-based research institute.“We have seen very good signs of demand picking up,” Mazrouei said. “We have seen numbers of driving vehicles are picking up,” he said, citing demand growth in China, India and Europe.

Still, the direction of oil prices will hinge to a large extent on whether a second round of infections forces economies into lockdowns once again, he said.

Led by Saudi Arabia and Russia, the group aims to support a rally that’s seen Brent more than double to around $40 a barrel since late April, paring its loss this year to 40%. For that success to continue, all OPEC+ members must adhere to their production quotas, while other suppliers must refrain from resuming output too quickly, Mazrouei said.

“In previous deals we had countries cheat because there was no rule. Now there is a rule, so countries are coming and stating their commitments,” Mazrouei said. The OPEC+ agreement has effectively created a “permanent” group of nations -- one bigger than the Organization of Petroleum Exporting Countries -- that will coordinate to manage crude markets, he said.

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Required Question:

Why cartels like OPEC fail to reach to consensus on price and quantity?

Answer 1

OPEC allied with other top, non-OPEC, oil exporting nations to form a more powerful entity called OPEC+. The goal was to exert control over the price of crude oil. To state some data, OPEC+ controls over 50 percent of global oil supplies and about 90 percent of reserves.

In the short term, OPEC+ has significant influence on the price of oil altering the supply but over the long term, its ability to influence the price of oil is diluted, primarily because all non-OPEC individual nations have different incentives than OPEC+ as a whole.

OPEC has faced immense pressure to act since oil prices fell into a bear market due to pandemic, as the coronavirus outbreak destroyed demand for fuel, initially in China were there is an "unprecedented stoppage" of economic activity. Prices have now fallen 33% since early January. OPEC need to curb production in order to avoid a sharp selloff, picking prices up slowly.

But in March 2020, Saudi Arabia and Russia, failed to reach an agreement about cutting production to stabilize the price of oil. Saudi Arabia retaliated by ramping up production sharply. This sudden increase at a time when global oil demand was sinking as the world was struggling with COVID-19 pandemic led to a great price crash.

Finally after seeing the impact, OPEC and its allies agreed to production cuts to stabilize prices, but they dropped to 20-year lows.

(As a result, the market, which is the final arbiter of the price, overrode OPEC+'s desire to stabilize the price of oil at a higher level than the laws of supply and demand dictated. Aside from reaffirming that market forces are more powerful than any cartel, especially in free markets, this episode also gave credence to the premise that individual nation's agendas will override cartel agenda. Brent Crude oil, as of April 14, 2020, costs around $30 per barrel, a level not seen since 2004, while WTI Crude oil costs $20.5 per barrel, a level not seen since 2002.)~ investopedia