Last barrel of patience

The OPEC+ agreement could fall apart again, repeating the scenario of the 1980s

The countries participating in the OPEC+ deal decided to reduce production quotas. The Russian share of the cut — 0.3 million barrels per day — is relatively small. The oil market reacted positively - prices rose. The Russian ruble also reacted positively. It would seem that everything is fine, but serious risks lurk behind the apparent well-being. It is unlikely that these risks will materialize in the near future, but you certainly need to be aware of them.

One of the classic ways of analyzing is to look back and find analogies in the past. In the early 1980s, the OPEC countries faced a problem that painfully resembles the current one: an oversupply of oil in the market. This threatened to drop prices, which categorically did not suit the OPEC countries. By that time, OPEC already had considerable experience in regulating the market. However, oversupply and the selfishness of some executives led to the collapse of the deal.

The fact that compliance with production restrictions is beneficial to all OPEC countries, no one questioned. However, many states have decided that a small excess of production quotas will allow them to make additional profits without a strong impact on the price. For a while it was. But when the violation of quotas became massive, the price began to sag.

It is noteworthy that then, in the early 1980s, and now the main participant in the deal, which accounted for the lion's share of the reduction in quotas, is Saudi Arabia.

For a long time, it was Saudi Arabia that voluntarily cut its production in order to maintain the price. Now Russia is also present in the OPEC+ deal, and in the early 1980s the USSR was actively increasing production (the peak of production in the USSR was in 1987).

Reducing the quota to keep the price high is a sound idea for oil exporters. But this idea also has its limitations, it cannot be followed indefinitely.

First, the reduction in the quota increases the cost of oil produced. This is due to the fact that any company has variable and fixed costs. With a decrease in production, fixed costs are distributed over a smaller volume of oil, which leads to an increase in the cost.

Secondly, market share is lost. This factor is quite critical for Saudi Arabia, as it also reduces its importance as one of the largest oil suppliers in the world.

Thirdly, export earnings are falling.

Nevertheless, for quite a long time, Saudi Arabia stubbornly compensated for the excess of quotas by other OPEC members by reducing its production. At OPEC meetings, the participating countries exchanged mutual reproaches and accusations, but it was the actions of Saudi Arabia that made it possible to keep the price.

In the end, patience snapped, after which on September 13, 1985, Saudi Arabia's oil minister, Sheikh Ahmed Zaki Yamani, announced that the kingdom was abandoning its policy of limiting oil production and was beginning to regain its market share. The price of oil fell, which, among other things, led to the collapse of the USSR.

The actions of the participants in the OPEC deal in the early 1980s are described very well in game theory by the "prisoner's dilemma": rational players will not always cooperate with each other, even if it is in their interests.

And since the OPEC countries did it once, the repetition of this scenario cannot be ruled out. The more non-OPEC+ production grows, the more likely the deal will fall apart.

Currently, the main threat to the OPEC+ deal comes from rising US production. By reducing their production, the participants in the deal are gradually losing both the volume of oil exports and their market share. In fact, there is an exchange of market share to maintain a comfortable price. But this exchange cannot continue indefinitely.

Curiously, both now and 30 years ago, Saudi Arabia bears the main victims - it accounts for most of the reduction in production. It is natural to assume that it is her behavior that will determine the fate of the OPEC+ deal. So far, there are no signs of a change in position. But the decision of September 13, 1985 was announced unexpectedly.

One of the possible reasons for the extremely tight fiscal and budgetary policy of Russia (as well as the increased formation of international reserves) may be related to the expectation of a repetition of the 1985 oil price drop scenario. The saying “generals always prepare for the last war” has not been canceled.