OPEC+ Quotas And Seinfeld Car Rentals

The OPEC+ cartel announced on Wednesday that it would up its export quotas for September by just 100,000 barrels of oil per day. Reuters reports that some analysts are describing the tiny bump as “an insult” to President Joe Biden, who traveled over to Saudi Arabia in mid-July at least in part to ask the royal family there to pour more oil onto the global market in advance of the November mid-term elections in the United States.

“That is so little as to be meaningless. From a physical standpoint it is a marginal blip. As a political gesture it is almost insulting,” said Raad Alkadiri, managing director for energy, climate, and sustainability at Eurasia Group.

The small quota increase seems especially insulting in light of the fact that the U.S. State Department moved on Tuesday to approve a $3.05 billion sale of U.S. military weapons and hardware to Saudi Arabia. If there was a quid pro quo involved here, it does seem out of balance.

Even more than that, though, the planned increase is effectively meaningless in the real world of crude oil production and exports. Why? Because OPEC+ as a group has under-shot whatever quotas it has set during every month for more than a year now. A recent analysis published by Bison Interests illustrates the cartel’s shortfall for June, 2022:

The reason why the group has persistently under-shot its quotas each month since last summer is well known and has been fully public for months now: Other than Saudi Arabia and the United Arab Emirates, basically every other OPEC+ member nation outside of Russia is out of spare production capacity. Russia, of course, has issues of its own created by its war in Ukraine.

It’s a reality the cartel again admitted in Wednesday’s official statement by saying, “The Meeting noted that the severely limited availability of excess capacity necessitates utilizing it with great caution in response to severe supply disruptions.”

The cartel’s recent reality when it comes to the setting and meeting of export quotas has greatly resembled the iconic episode of Seinfeld in which Jerry and Elaine attempt to rent a car. In the classic scene, they arrive at the counter to pick up the car, only to discover that the rental company has no cars available despite having accepted Jerry’s reservation, something so many of us have experienced in real life.

Here’s how the ensuing dialogue went:

• Jerry : I don’t understand. Do you have my reservation?
• Rental Car Agent : We have your reservation, we just ran out of cars.
• Jerry : But the reservation keeps the car here. That’s why you have the reservation.
• Rental Car Agent : I think I know why we have reservations.
• Jerry : I don’t think you do. You see, you know how to *take* the reservation, you just don’t know how to *hold* the reservation. And that’s really the most important part of the reservation: the holding. Anybody can just take them.

[End]

By the same token, any OPEC+ country can *set* a target quota for oil exports; but the key part of the transaction is whether or not that country can ultimately *meet* that target quota with actual production capacity.

OPEC+ thinks it knows why it *sets* quotas, and does so each and every month. What it has failed to do in every month for the past year, though, is actually *meet* those quotas. Because, just as the car rental agency on Seinfeld had run out of cars, this cartel has essentially run out of spare capacity.

It’s a situation with significant global implications. When OPEC+ was created in late 2016, its member countries were initially able to exert a great deal of influence over the rise and fall of crude prices on the global markets, deploying their spare capacity when needed to lessen volatility. As I’ve chronicled here over the years, the cartel experienced a high degree of success before the COVID pandemic hit in early 2020.

Since that time, though, oil prices have risen and dropped wildly as the cartel’s influence has waned along with its level of spare capacity. There is a direct cause and effect relationship at play here, one that has rendered the quota announcements by OPEC+ as meaningless as the car rental agency *taking* Jerry’s reservation in that classic episode of Seinfeld.

Because it is the ability to *meet* that quota that really matters.