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OPEC’s Fight Club

Groucho Marx didn’t want to belong to any club that would accept him as a member. Do OPEC countries ever feel the same?

The cartel meets on Wednesday for a special session, mostly so Venezuela can present its plan to establish and enforce a price band for oil of $70 to $100 a barrel. Venezuela is a founding member of OPEC, so certain courtesies must be extended for appearances’ sake. Yet one member in particular, which holds a certain level of influence, would be mad to actually embrace the plan.

Venezuela is a mess, “the weakest link in the oil supply chain” as energy economist Phil Verleger puts it. Foreign exchange reserves just hit a 12-year low of $15.3 billion, and the country has $4.5 billion of debt payments this month and next. Food shortages, looting and blackouts are stoking misery and tension ahead of December elections. Venezuela needs the extra cash flow higher oil prices would bring, and it needs it now.

Unless Saudi Arabia, OPEC’s de facto leader, is in a pitying mood, it won’t do anything to help. Yes, it has been burning through its own foreign exchange reserves. But as the chart below shows, it still has a lot of them. There’s some bad blood between Riyadh and Caracas anyway. Venezuela’s attempt to maximize its own production and take market share in the mid-1990s was one of the major causes of the 1998 price crash. It ultimately took concerted action on the part of OPEC and other producers outside the group to curb supply to support prices.

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After Year of Pain, OPEC Close to Halting U.S. Oil in Its Tracks

The nation’s production is almost back down to the level pumped in November, when the Organization of Petroleum Exporting Countries switched its strategy to focus on battering competitors and reclaiming market share. As the U.S. wilts, demand for OPEC’s crude will grow in 2015, ending two years of retreat, the International Energy Agency estimates.

While cratering prices and historic cutbacks in drilling have taken their toll on the U.S., OPEC members have also paid a heavy price. A year of plunging government revenues, growing budget deficits and slumping currencies has left several members grappling with severe economic problems. The fact that the U.S. oil boom kept going for about six months after the group’s November decision also means OPEC has so far succeeded only in bringing the market back to where it started.

“It’s taken a hell of a long time and it will continue to take a long time — U.S. oil production has been more resilient than people thought,” said Mike Wittner, head of oil markets research at Societe Generale SA in London. “The bottom line is the re-balancing has begun.”

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