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OPEC: Most club members are losers

OPEC: Most club members are losers
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First Published: Fri, Sep 12 2008. 11 39 PM IST

Updated: Fri, Sep 12 2008. 11 39 PM IST
Brazil has declined to join the Organization of the Petroleum Exporting Countries or Opec. The cartel’s production limits would hamper its plans to increase output. Russia, by contrast, wants extensive cooperation with Opec. Its declining production makes it interested in maximising short-term prices. Opec cartel membership appears politically driven, but in reality it’s for oil output losers.
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The political arguments do match up. Brazil has extensive trading ties with the rich West, particularly the US. Hence it won’t join a club the US regards as potentially hostile. Russia, on the other hand, is seeking to assert itself and counter perceived US hegemony. Coordinating its moves with Opec could allow it to use its oil more effectively as a geopolitical lever.
However, economic motivations are at least as important. Brazil has great hopes for its new offshore oil fields, and expects to expand oil production and seek new markets. The last thing it needs is restrictions on production.
Russia has, conversely, failed to fulfil the potential of its oil reserves. With 12 of its 14 largest oilfields pre-dating the fall of the Soviet Union, it is now past the peak of its oil output. Hence it is taking greater control of its remaining energy assets, seeking to maximize their economic as well as political pay-off. While Russia probably cannot join Opec because of Saudi Arabian fears of losing control, coordinating with the cartel to maximize short-term oil prices makes economic sense.
Assuming expanding oil producers such as Brazil continue to shun it, Opec will decline in importance in the years ahead and should lose its remaining ability to control prices by restricting supplies. Oil-consuming countries can help that process along by keeping a lid on their oil consumption and encouraging countries such as Brazil to stay out of Opec.
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First Published: Fri, Sep 12 2008. 11 39 PM IST