Coronavirus, Oil, and Kansas

Planet Money


Okay Jacob first thing. We've got to talk about here. Is OPEC the Organization of Petroleum Exporting Countries? Which is this amazing global economic thing. Yes so okay. Opec goes back to the nineteen sixties. That's when a bunch of oil. Exporting Countries all got together and they ask themselves this basic question. Why are we all competing with each other? Why are we all pumping more and more oil and selling it for lower and lower prices when instead we all just get together and agree to limit production and sell oil for a higher price? So they formed. What's called a cartel? A cartel is basically just a bunch of different people or companies who are in the same business or industry and they get together and agree to limit production and coordinate prices. Doing this form. A cartel is any industries basically. It's their dream. Come true you know. Instead of competing out in the brutal world of the free market you just carve up the market with your pals and let the prophets role. In in fact the only reason more industries don't do this don't form cartels is because it is wildly illegal if all say that airlines in America got together and decided. Let's just coordinate on routes and fares and they got caught. They would be massive legal trouble but those. Us rules don't apply to the countries and OPEC they're Muslim countries in the Middle East and Africa. And they're those oil industries are largely controlled by their governments themselves. So they're oil. Ministers can get together and decide how much oil each country is going to produce for decades OPEC was this cartel unofficially de facto lead by Saudi Arabia. That had all this power over the world's supply of oil when OPEC decided to cut back. The price went up when they decided to pump more. The price fell and then just in the past decade or so that changed fracking took off the United States and suddenly the US was producing all this oil and the US of course the oil industry is private not public the US is not part of OPEC so the rise of US oil production meant that the Saudis and the other OPEC countries could no longer cut back on production and control. The price like they used to. The cartel was just not that strong anymore so to fight back. Opec got bigger the teamed up with Russia. We don't really think of Russia as a petro state but it sort of is. I didn't really realize this before we started working on the story but along with Saudi Arabia and the US. It's one of the three biggest oil producing nations in the world. Something like half of its government. Budget comes from oil and gas revenue. People started calling this new group of Saudis and the Russians and everybody else OPEC plus sounds like a boring streaming service. Actually a pretty effective global mega cartel and in two thousand sixteen the OPEC plus countries agreed to cut production. Prices started going back up and the cartel dream was back. The cartel was working until just a few days ago when something at the cartel went horribly wrong and Mary. When we came in Monday morning we saw this stuff happening in the oil market. I asked You like. Who Should we talk to? So my immediate thought was Ed Crooks if I have to phone a friend on oil. I'm calling Ed. He used to cover energy at the times for ages. Now he's at an energy consultancy. Wood Mackenzie so on Monday. Ed came in to help us make sense of what was going on. It's one of those days that you get very very rarely In life very rarely the oil market or in any other business which is a really dramatic unexpected event. That completely changes your world. Ed says okay to understand what is just happening in the past few days with oil. Start by going back. A couple of months. Think about China's response to the corona virus. Which of course we've heard a lot about but this time think about it from the point of view of oil what we saw in China were these very very Severe measures in order to curb the spread of the virus and so there's a lot of factories closed huge restrictions on travel. People would not driving around goods. Not being trucked around people would not flying and so all of those things hit oil demand in China in particular and China is the world's biggest oil importer so in the first few months of this year the global demand for oil fell by the most since the financial crisis more than ten years ago and the price of oil just started falling so just last week. The country's in OPEC in the oil cartel got together to do what cartels do European countries got together on Thursday. And they said right. This is all plan. We need to count a production by one point five million barrels a day to the end of the year we should bring the oil market back into balance. And that way everybody. Happy and prices will stabilize so that is old school. Saudi led OPEC the next day. They go to meet with. Opec plus basically adding in the Russians. The Friday you start hearing noises from the Russian Camp. Well then not happy about this. They weren't necessarily going to go along with it. So it's getting weird. There are delays. It's clear that not all is well. It's clear that you aren't just going to have an easy agreement. Everyone coming out and smiling and shaking hands or maybe not shaking hands and saying yeah. We've all agreed on this. One point five million barrels a day cut and the time dragged on and then the meeting kind of broke up in chaos and the this was the really kind of telling a comment when the Russian Energy Minister Alexander. Novak walked out of the meeting. He said everyone can pump as much as they want. He said you can pump it will. What did you think when you heard what had happened so I thought wow with my first reaction? I thought that the edited version. I mean the whole point of a cartel is UK at pump as much as you want right exactly. That discipline is everything. A cartel needs to things. It needs as larger market share as possible as many members as possible and it needs discipline and on Friday. It seemed to lose both of those things and then in the days after the meeting Russia and Saudi Arabia both went further. They said okay. Not only. Are we not going to cut production. We are going to increase production that promise of increased supply. Even as demanded falling led to that giant fall in oil prices on Monday. There is this really basic question here. Which why these countries have this dream thing that most businesses would kill for a cartel they can rig the market in their favor. All they have to do is agree to cut production. Why didn't they do that? The absolute truth of the of the. Why did this fall apart? One is that we are still trying to find out I'll selves. We don't really know but it does have an educated guess. It's frankly the best explanation I've heard for what happened and I love it because it speaks to. What's going on here with OPEC but it gets at this really basic kind of human tension that exists in any cartel. It works like this everybody in the cartel agrees yes sure we should cut production and

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