Just hours after the International Energy Agency made its prediction that the U.S. would become the world’s dominant oil producer in eight years, I got an email suggesting that the U.S. should join OPEC.
When I asked the sender if he thought OPEC would have us, he sent me a copy of OPEC’s rules on membership and noted that “we share the same objectives of price stability and return on investment.”
Actually, we don’t. In the U.S., the investment return is for oil companies and their shareholders, while for OPEC countries, the return is for state-owned oil companies and, ultimately, the governments of the member countries.
While OPEC favors stable prices, it uses its influence as a cartel to control prices by getting members to agree to production levels.
That leads to a more fundamental question: as a champion of free markets, should the U.S. be joining a cartel that achieves its goals by manipulating markets?
Of course, the whole idea may be moot. Michael Economides, an international energy expert and professor at the University of Houston, notes the IEA prediction ignores the economic realities of the market.
“This is a silly report,” he told me. “The idea that Saudi Arabia would allow the U.S. to increase production that much is ridiculous.”
If U.S. production increases, and global prices dip, imports become more attractive. If OPEC wants to beat back U.S. competition, it only has to raise its quotas even further.
The resulting price declines would undermine the profitability of expensive U.S. shale plays. Our domestic drilling reflects the industry’s cutting-edge technology, but it’s only higher global prices that make it economical.
“We take advantage with our efficient production of the fact that they are not very efficient,” Economides said.
I discuss the IEA report in more detail in today’s column, but the idea of joining OPEC is less likely than the IEA’s prediction that we will become an exporter. Even if we wanted to join, OPEC will use our own free market principles to keep us out of their club.