Today's "surprise" OPEC decision to increase crude production by 500,000 bbl/day above ACTUAL current OPEC production is one more instance of a situation where there is far less than meets the eye.
The first question which comes to mind: why increase above actual production and not above the current quota? The answer to this question provides useful insight into the actual workings of the OPEC member states. Current OPEC production is well above the official quota because virtually all the non-Saudi members CHEAT. In fact, they are pumping flat out within the constraints imposed by actual production problems. Moreover, this phenomenon of de facto ignoring of quotas and pumping as much as possible is par for the course at OPEC.
Consequently, as we have argued in an earlier analysis, OPEC decisions and OPEC quotas are irrelevant to the global supply/demand balance for crude. It is Saudi Arabia alone which counts. Indeed, the Kingdom is crucial. Only the Kingdom possesses a real surplus which it could pump should it so choose. Of course, no one besides the inner circle of the Saudi royal diwan actually knows what this spare capacity is. As we have noted before, it is in the self-interest of the Saudis to allow the world to believe that it is larger than it may actually be.
"OPEC" decisions in turn mean nothing to the Saudis. They have ignored OPEC "decisions" and quotas in the past, whenever it has suited them to do so.
Saudi oil policy is a cleverly crafted instrument designed to optimize -- though not, in the short term, to maximize -- Saudi revenue. Traditionally, the Saudis have sought to negotiate between the Scylla of overproducing, with serious negative consequences for oil prices and the revenue the Kingdom needs/seeks, and the Charybdis of keeping crude prices too high and thereby creating a sustaining economic basis for massive investment in alternative energy sources. During earlier periods of global economic weakness, oil overproduction, and crashing oil prices, the Saudis were pressed into an unpleasant situation, having to bail out various white elephant projects, royal rake-offs, and meet mounting demands for services and financial aid from their growing population.
The tripling of oil prices over the past half decade has relieved most of these stresses. The Saudis, consequently, have more room for maneuver. There are, however, ominous geopolitical threats, of which the Saudis are well aware. It is by no means clear that the Saudis will seek to reduce Iran's capabilities by allowing oil prices to fall, thereby reducing the revenue available to the mullahs in Tehran. There are undoubtedly voices arguing in favor of appeasing the Iranians within the royal family. Moreover, the ever-growing financial demands of the Saudi populace, fear that fundamentalists may turn against the regime, and sheer greed -- fed by the sense that the major consumers can adjust quite nicely to steep oil prices-- are acting against any impulse in Riyadh to provide relief to major consuming countries.
The Saudis know that the fundamentals of the market have shifted profoundly, with the emergence of voracious oil consumers in eastern and south Asia. The high costs, undesirable environmental side effects, and economic consequences of many bruited about alternative energy schemes are well known to the Saudis.
Today's quota increase will do little to change the supply/demand equation, barring a serious US recession and/or a financial collapse in China. The Saudis' oil policy currently mimics that of the FED: do as little as possible while claiming to be taking timely action.
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