The Real Price that OPEC Wants: Geese vs. Black Swans

Now that OPEC is playing nice with one another, at least temporarily, there is lots of discussion about the price OPEC wants for crude oil. Everyone says that OPEC likes higher prices, to a point, with the implicit argument being that there is some price at which OPEC members make lots of money, but it still dissuades investments in alternatives.

That’s true, sort of. But it misses something important. Predictable prices, even at higher levels, are easier to invest around than unpredictable prices. If you know, in some sense, that crude oil prices are going to be over $100 for some time, you can plan accordingly as an investor, entrepreneur, integrated oilco, etc.

The trouble comes when you’re worried that the bottom may fall out of the market at any time. What if prices a year from now are half of what they are today? What if they "merely" fall by 25%? What does that do to your business model? To your investments? To your production?

That’s why I disagree with the common wisdom that OPEC is in the predictable goose-plucking, tax business — that of extracting the most feathers with the minimum of hissing. Instead, OPEC is in the unpredictable "black swan" business: Its optimal time series of prices is something like $100, $100, $100, $10, $100. Big, unpredictable and intermittent crude oil price decreases will do more than anything else to keep OPEC precisely where it is in the market: A wildly profitable cartel with control of a crucial commodity.