UAE’s decision to quit Opec may have come as a surprise, but it’s a good thing. For, Opec is nothing but a cartel, and cartels take a toll on customers. They’re everything free markets ought not to be – a tacit agreement to not compete. Yet, it is a sad truth that they hide in plain sight even in so-called market economies. EU, which is vocal about free trade, has fined auto component suppliers billions of dollars for collusion.
Year after year, it’s found prices of parts ranging from spark plugs to headlights, airbags, and even the foam used in seats, fixed. In Britain – Adam Smith’s home – 50 leading schools, including Eton, Harrow, Westminster, were found colluding on fee revisions. Even Apple was caught rigging ebook prices in 2013. It got publishers to pull ebooks from Amazon’s Kindle store, and sell them at higher rates on its own store.
Unlike those cartels, Opec’s actions have touched everyone everywhere. Because nobody is immune to the prices of diesel, plastic, fertiliser and textiles. John Asker, who teaches economics at UCLA, has estimated that Opec’s actions cost the world $5.7tn between 1970 and 2014. Considering that a 3% loss of GDP typically results in recession, he estimates that Opec had inflicted the equivalent of a 2.5-year recession on the world by 2014.
Of course, UAE’s exit isn’t a matter of high principle. It’s leaving Opec to increase production and revenues, without being hobbled by the group’s quotas. Every oil producer knows that electrification and decarbonisation are inevitable. China’s rapid electrification, for example, has already reduced its hydrocarbon demand by 1mn bpd. So, for oil and gas producers, now’s the time to sell as much as they can. UAE’s current production capacity is 4.8mn barrels per day, and it wants to sell 5mn bpd by 2027. But Opec allows it to sell only 3.4mn bpd. Hence, the break.
Opec has already lost much of its clout, and aggressive production by US, UAE, etc, will be good for the world economy. If crude tumbles towards $50, as was expected before US and Israel attacked Iran, inflation will slow down, and growth inch up. If cracks in one cartel can do that, imagine the good broader decartelisation would do. From phone tariffs to plane tickets, house prices to school fees, every rupee saved is greater purchasing power in the customer’s hand. Your hand.
Disclaimer
Views expressed above are the author’s own.
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