Why is opec caught in a prisoner dilemma

With nationalism rising throughout the world, these governments are now even more pressured to do what is best for their countries, not the cartel. As if to emphasize this point, OPEC reports two sets of official numbers for oil production by its members: one based on direct communication, the other on secondary sources. Based on the numbers released at the OPEC meeting on Wednesday, it would seem that the direct communication figures were used, which were conveniently higher than production figures confirmed via secondary sources.

That means that even if all OPEC member states abide by the production caps, it could be relatively meaningless because they inflated the starting point. There is no global oil police force capable of dishing out punishment to those violating agreed upon rules. Many of these countries are struggling economically and see those struggles manifest in serious political and social problems within their own societies.

They have every reason not to trust each other and no compelling reason — beyond being similarly up the creek — to cooperate. The other factor to consider is that OPEC and Russia do not necessarily want the price of oil to rise too high.

The shale revolution has fundamentally reshaped the oil market. The U. OPEC still has far more spare capacity than any country or grouping of countries. But a number of drilled but uncompleted wells DUCs in the U. Saudi Arabia and other major oil producers are caught between a rock and a hard place. On the one hand, they need oil prices to increase to stabilize their economies. But as prices rise, it creates more incentive for members to cheat and produce more.

Because marginal revenue is higher than at lower prices, there is greater payoff from raising output — even in the face of production caps. Game theory perfectly explains why OPEC members are going to cheat. Gina Heeb. OPEC and the US natural gas market have been experiencing the opposite of a commodity bust for the past few years.

An increase in the amount of natural gas produced in the US led to a large drop in oil prices in Both parties are keeping production high, and therefore prices low, in hopes that the other will run out of money and have to cut production to raise prices. The best possible payoff for either party occurs when they raise production, and the other cuts production. Output slipped in the week through November 14 by less than 60k barrels a day, but we would not read much into that.

The press reports that rather than be deterred by the decline in prices, some companies, like Encana plan to dramatically increase the number of wells in the US Permian Basin Texas next year. There has been a very modest reduction of oil rigs. However, this has been largely offset by the rise in productivity of the existing wells.

For example, in the North Dakota Bakken area, the output per well has risen to a record. In addition, industry reports suggest that the costs of shale and horizontal drilling is falling. Although the price of oil has fallen below budget levels for many oil producing countries, the situation is not particularly urgent.

Seasonally this is a high demand period. Most countries have ample reserves to cover the shortfall in the coming months. Around March, the seasonal factors shift and demand typically eases. That is when some key decisions will have to be made. It may not sound like a significant tell, but when the next OPEC meeting is scheduled may be indicative of a sense of urgency.

A meeting in the February-March period may indicate higher anxiety than say a meeting in the middle of next year. One study by Bloomberg found that only two OPEC quota cuts have been for less than one million barrels. A Bloomberg's survey found that the respondents were evenly split between expecting a cut and not, few seem to be actually anticipating a significant cut.

This suggests the scope for disappointment may be limited. That said, there is gap risk on the US oil futures contract come Friday, when they re-open after Thursday's holiday. As a consequence of lower oil prices, some oil producers may have to draw down their financial reserves to close the funding gap.