This article first appeared at The McAlvany Intelligence Advisor on Wednesday, February 18, 2015:
Six years ago historian Daniel Yergin wrote in The Prize about OPEC’s failed gamble in 1986. The cartel tried to secure its preeminent place among the world’s oil producers by forcing crude oil prices down:
Was the price now poised for a great fall? Most of the exporters [primarily OPEC] thought so, but they expected no more than a drop [from more than $30 a barrel] to $18 or $20 a barrel, below which, they thought, production … would not be economical….
Actually, operating costs – the cash costs to extract oil – were only $6 per barrel [at the time], so there would be no reason to shut down production at any price above that.
The cartel was hoping to squeeze out marginal producers, which would result in cuts in supply, allowing it to raise prices at will. It didn’t work then, and it isn’t working now. The Saudis apparently suffer from an appalling lack of understanding about how the free market works.