Rice Expert Alert: Oil glut: ‘The mother of all collective-action problems’

EXPERT ALERT

David Ruth
713-348-6327
david@rice.edu

Oil glut: ‘The mother of all collective-action problems’

HOUSTON – (Nov. 3, 2016) – Two Rice University energy experts are available to comment on oil prices plummeting this week. Barrel prices are down to $45, the lowest level since September, according to OilPrice.com. The revival of oil production and massive inventory buildup has led to a significant surplus, creating a perfect storm for suppliers to undercut each other.

“The glut looks like the mother of all collective-action problems as the temptations to free ride by taking action against OPEC’s best interests appear insurmountable,” said Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy.

Krane, who is also a scholar of Middle East politics and economics and an award-winning journalist, noted that OPEC is in a tight spot as oil producers need revenues to cover national budgets and have every incentive to collude to cut production in hopes of propping up prices.

“Saudi Arabia led the way, signaling its willingness to make a symbolic cut,” he said. “A few others, including Russia, agreed to play along. None of the OPEC sacrifices promised in Algiers last month were significant, but the language was compelling. Oil prices cooperated, jumping by about $5 after the Algiers meeting. But the deal collapsed when four key members — Iran, Iraq, Libya and Nigeria — demanded exemptions. Add that to the quick revival in U.S. shale oil production, and oil price gains fell to the wayside.”

Kenneth Medlock, the James A. Baker III and Susan Baker Fellow in Energy and Resource Economics at the Baker Institute and the senior director of the Center for Energy Studies, noted that while most of the focus is on the glut’s supply side, assessing the demand is equally important.

“The issue that is often lost in the current market discussion is the lethargy in demand that has resulted from relatively sluggish global economic growth,” Medlock said. “This will eventually reverse and will most likely be driven by developing economies in Asia. So the future of the global oil market rests with future demand growth among the 3 billion people living in India, China and Southeast Asia.”

For more information or to schedule an interview with Krane or Medlock, contact David Ruth, director of national media relations at Rice, at david@rice.edu or 713-348-6327.

The Baker Institute has a television and radio interview studio available.

-30-

Follow Jim Krane on Twitter @JimKrane.
Follow Kenneth Medlock on Twitter @Ken_Medlock.
Follow Rice News and Media Relations on Twitter @RiceUNews.

Founded in 1993, Rice University’s Baker Institute ranks among the top five university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. Learn more about the institute at http://www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.