The Natural Rate of Cheating

17Dec08

FT Alphaville:

As expected, Opec has cut its output target by another 2m barrels a day – the cartel’s biggest single cut in several decades. The decision reduces the  Opec-11’s (excluding Indonesia and Iraq) total production target to 25.3m barrels per day, according to JBC Energy.

The world expects many things, but I think even Opec’s members expect cheating from within the cartel. If they set a 2 million barrel cut as a target (being a cartel, it can only be a target), they have more leeway for cheating than if they set two hundred thousand barrels as the target.

Basically, if the natural rate of cheating is 10%, cutting the world oil supply by 1.8 million barrels is far more effective than one hundred and eighty thousand barrels.

Still think it’s all desperation and that it’s not going to work though.

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