By Micah Halpern
I've Been Thinking:
When you join a cartel you are making a commitment to live up to the agreements made by the cartel. OPEC is no exception.
So when a decision is made to cap oil production, like OPEC and Russia did last week, everyone else must fall in line.
There is, however, an incentive to cheat - an incentive to sell more and make more.
Last week's agreement was an attempt to stem the 18 month long downward price of oil. The agreement was to cap production at January's levels.
And then Iran decided to reject the agreement. Actually, Iran's oil minister called the entire plan ridiculous and a joke. Iran wants to produce more and more oil because sanctions against them have been lifted and they are not yet up to their full potential.
In other words, they need the money.
So does Russia, Venezuela, Qatar and Saudi Arabia. If Iran continues to produce more and more oil thereby lifting the ceiling, the price of oil will drop even more. And all those oil producers whose breakeven point is above $35 to $40 will be crushed.
And that, of course, includes Iran. Saudi Arabia's breakeven point for the production of one barrel of oil is $30. The Saudis can afford to make only $5 per barrel. They will make less, but in the long run, as other countries drop out, they will make more.
Now we know that the other OPEC members did not agree with the Russian deal on limiting the output of oil.
We will see what happens next.
Micah@MicahHalpern.com
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