Response to 1st student
Chances are slim for the OPEC to reach a binding agreement. Follet (2016) noted that Saudi Arabia was not willing to reduce production to increase prices despite calls from other member states. As I mentioned in my post, the previous agreements were met with suspicion as some of the members would increase production other than cut to edge the others out of the market. Low prices mean that the countries need to sell more oil to maintain their revenues. It follows that the countries may not absorb the loss associated with decreasing production. Competition has created distrust among the OPEC. The entrance of new producers, such as Shale Oil in America places OPEC in a tricky situation. Besides, some of the OPEC members are entangled in diplomatic conflicts that make cooperation complicated. For instance, Iran and Saudi Arabia have foreign challenges making it difficult to coordinate in oil production (Follet, 2016). OPEC may encourage members to follow agreements by improving diplomatic relations among themselves.
Reference
Follet, A. (2016). Saudi Arabia Just Shattered OPEC, Won’t Reduce Oil Production. The Daily Caller 24 February 2016. Retrieved on February 29, 2016 from http://dailycaller.com/2016/02/24/saudi-arabia-just-shattered-opec/
Response to 2nd student
Creating an artificial shortage by scaling down production may seem a viable idea in the short term. However, it is untenable in the long-term because it would encourage oil exploration and exploitation in other countries, such as Kenya and Uganda where there were recent discoveries. To increase the prices, one has no option other than addressing the causes of the low costs. The conditions that led to the low prices are entirely out of control of the OPEC. Krauss (2016) noted that the American entrance into the market distorted the global status quo in oil production. As a result, the over-supply and competition led to reduced oil prices. Further, Krauss (2016) argued that the market can respond to the low prices without intentionally cutting down production. The exploration and overall investment in new areas have stagnated. Although the drop in output has not been fast enough, the chances are that it may eventually decrease significantly and trigger price increases.
Reference
Krauss, C. (2016). Oil Prices: What’s Behind the Drop? Simple Economics. The New York Times February 16 2016. Retrieved on February 29, 2016 from http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html
