Saudi Arabia and the limits of signalling

‘Exporting countries, and more generally, the industry, have much to learn from oil developments in recent months. Lessons can be derived from an analysis of the causes of the oil price fall …’ Robert Mabro wrote this in 1998, and added: ‘An opportunity has now arisen for oil exporting countries, both from within and outside OPEC, to re-think the framework and substance of their co-operative policies. … The oil price crisis may prove deeper than initially thought and may remain immune for a while to the remedy which OPEC and other oil exporting countries are trying to apply.’ The ‘oil market’ – this difficult-to-define collective entity, which, through its collective ‘sentiment’ or ‘consensus’, determines the going prices for various contracts or ‘paper barrels’, which in turn conditions the prices of physical barrels – has an extraordinarily short memory. Several commentators have rushed to argue that today’s situation is different from that in 1985–6, and again from 1998, while in fact there is a simple common feature: there is too much oil in the market at prices that have for too long remained unreasonably high. The dynamics of the oil market are characterized by a succession of delusions and corrections. Trading in paper barrels feeds some widespread delusions – beliefs that cannot possibly withstand critical analysis, yet which come to be accepted as received wisdom. Such delusions are not promptly corrected in a market which – rather than moving towards an equilibrium of global demand and supply – allows profits to be made by those able to guess in which direction collective sentiment will go. As the price is driven further and further away from equilibrium by invented explanations, eventually reality catches up and a sharp correction ensues.