The OPEC Cartel

“A cartel is a formal (explicit) agreement among firms. Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these.” Source – Wikipedia

By far the largest Cartel is the oil cartel. In most other industries, the competition authorities would be up in arms at such behaviour. Yet, with home values plummeting, and stock market diving to its worst week in history and the inflation rate sitting uncomfortably outside central bank’s target areas, OPEC has signalled that it will cut production in an attempt to keep oil prices artificially high.

Why is there no outrage across suffering economies at such blatant profiteering? Why do the media and governments sit on their hands and say nothing about one of the most widely used commodity prices being rigged and not subject to open market forces on the downside? Why are ordinary people allowed to suffer from increasingly unaffordable fuel prices as unemployment rises and the cost of basics like food and energy surges?

The oil prices weren’t subject to any cartel controls when they went to $147 a barrel, but yet when economic activity slows, every person on the planet is forced to pay more than they should at a time when they can least afford it.

The answer is that the game is rigged, as the very nature of OPEC suggests. Allowing oil prices to fall with market forces as they rose with market forces would cost oil producers a lot of money. OPEC couldn’t raise output in a meaningful way when the oil price was rising to help offset the higher prices and stop the economies from falling into recession during the inflationary spike.

Maybe the peak oil crowd is right…may be the end of oil is in sight, and the oil producers are determined to squeeze every single dollar of profit from their dwindling resources before the game ends and our love affair with oil finishes. If that is true, looking at the current market turmoil, baby, you ain’t seen nothing yet.

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Tags: Cartel, Money Management, Oil, OPEC