OPEC Has a Deal, But Will Its Members Cheat?

Cartel has history of failing to enforce output limits

By ALISON SIDER and BENOIT FAUCON , Wall Street journal
11 Dec 2016

In reaching November’s landmark agreement to reduce oil production, OPEC members labored for months to overcome their mutual suspicions and frequent mistrust.

But reaching the deal could turn out to be the easy part—enforcing it could be another matter.

The Organization of the Petroleum Exporting Countries has a history of failing to enforce its own production limits, according to numerous energy analysts and former OPEC officials. The cartel’s agreements usually spell out exactly how many barrels a day each member must cut. But ensuring that everyone abides by these quotas has been supported only by a fragile honor system, with OPEC having no official mechanism for punishing members that stray from their pledges.

In 17 production cuts since 1982, OPEC members have reduced output by an average of just 60% of their commitments, according to Goldman Sachs. OPEC exceeded its quota by an average of 883,000 barrels a day from 2000 to 2008, according to Morgan Stanley.

“The unfortunate part is we tend to cheat,” Ali al-Naimi, Saudi Arabia’s former oil minister, said of OPEC members at a Washington, D.C., event this month.

The emphasis on compliance was heightened Saturday, when 11 countries outside of OPEC gathered at the cartel’s Vienna headquarters and agreed to cut 558,000 barrels a day together. OPEC and the non-OPEC members didn’t release details about who would cut how much, when or how the pact would be enforced.

OPEC members routinely game production figures in efforts to protect their own market share during negotiations or to mask production beyond their allotted quotas, oil traders and analysts say. Even the production data are often in dispute. OPEC publishes two sets of numbers: production estimates it gathers from independent sources; and figures reported directly by the members.

This lack of transparency has helped spawn a group of industry watchers that monitor oil-tanker loadings and pipeline volumes in an effort to determine how much OPEC members actually are pumping. These groups supply their data to traders and oil companies—as well as to OPEC members themselves trying to keep tabs on each other.

One such firm, Petro-Logistics SA in Geneva, collects intelligence through a network of sources stationed around the world, the company has said.

“If I told you who they were, they might get their heads chopped off,” Conrad Gerber, the firm’s late founder, told The Wall Street Journal in 2000. “I can’t call them in their offices because their phones are tapped.”

An OPEC spokesman didn’t respond to requests to comment about compliance with production quotas.

Now, seeming to address the issue after decades of grousing about it, OPEC is setting up a committee to oversee compliance with the new pact. It is being led by Kuwait, Algeria and Venezuela, Russia and a still-unnamed producer from outside the cartel.

OPEC Secretary-General Mohammad Barkindo said in an interview the group had taken unprecedented steps to monitor the implementation of the Nov. 30 deal negotiated in Vienna.

“The establishment of the joint Ministerial Committee to oversee compliance, makes the Vienna Agreement measurable and verifiable,” he said last week.

Oil prices rose more than 14% in the days after the group announced its plan to reduce output by 1.2 million barrels a day for six months. Part of the gains, some say, reflected optimism that OPEC members have less incentive to cheat than in the past.


“They’re fully aware they need to rein in inventories. I think the adherence will be better than the market anticipates,” said Doug King, chief investment officer at RCMA Asset Management.

The stakes are high. Abdallah Salem el-Badri, a former secretary-general of OPEC, said full compliance with the announced production cuts is “a must” if producers want to lift prices. Two years of pain from low prices improves the odds of compliance, he told reporters at a Platts conference in New York on Thursday. “When the situation is very difficult, everybody is adhering,” he said.

Still, not all are convinced. Oil prices drifted lower last week as doubts crept back in, with skeptics pointing to data showing that OPEC’s output kept growing in November, even as members were publicly pledging to cut back.

“If the price of oil goes up, everybody will be tempted to cheat a bit,” said Geoffrey Heal, a professor at Columbia Business School who served as an economic adviser to OPEC during the 1990s. “The odds on success are probably 50-50.”

Cheating sometimes has had dire consequences for cartel members. In 1985, Saudi Arabia officials said they grew so tired of fellow members ignoring their agreed-upon quotas that they abruptly raised production in retaliation, sending crude prices into a tailspin.

Some unresolved disputes turned violent. In July 1990, Iraqi President Saddam Hussein threatened an attack if Kuwait didn’t comply with its production limit, according to media reports at the time. Kuwait eventually slashed production, but Mr. Hussein invaded anyway. A few months later the Gulf War broke out to drive out Iraqi troops.

During the financial crisis, OPEC’s lack of public credibility surrounding production cuts backfired badly. In 2008, the cartel agreed to a record output cut of 4.2 million barrels a day in response to plunging prices.

OPEC’s quota enforcement rose to as high as 81% after that agreement, according to data from independent sources. But oil prices kept falling at first—in part because investors didn’t believe the cartel’s members would keep their promises, analysts say.

OPEC members know each other well enough to anticipate some deception, said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

Even with the new oversight, if cheating is discovered a few months from now, “it will be like finding out there was gambling at Rick’s Café,” he said.

—Lynn Cook contributed to this article.

Write to Alison Sider at alison.sider@wsj.com and Benoit Faucon at benoit.faucon@wsj.com