Kick OPEC While It's Down

Dis-organizing petroleum exports.

Photographer: Joe Klamar/AFP/Getty Images

The Organization of Petroleum Exporting Countries is in disarray. The price of Brent crude fell to less than $38 a barrel on Friday, the lowest since 2008. If the cartel had been working, it would be cutting output to force prices back up. Its members chose to keep pumping.

QuickTake Oil Prices

Why? Because just as demand from emerging markets is slowing, technology has changed the economics of oil. That's bad news for OPEC, but good news for everybody else -- especially if the U.S. government and others have the wit to kick OPEC while it's down.

The U.S. shale-oil revolution has greatly increased non-OPEC supply. At the same time, efforts to curb oil consumption as part of the fight against climate change are further limiting the cartel's power to set prices. Oil prices are notoriously hard to predict, but these forces aren't going away, and they mean that OPEC's troubles may not be temporary.

QuickTake Fracking

Shed no tears. If the cartel collapsed altogether, there'd be no need to reinvent it. Meanwhile, OPEC's weakness presents an opportunity -- and smart policy can make the most of it.

Cheap oil will directly boost growth in most of the world, but with side effects that need to be managed. The fall in oil prices will encourage oil consumption, both in the short term (people will use their cars more) and long term (they'll buy cars that are less fuel-efficient). This works against reducing carbon emissions, and over time could help to restore OPEC's market power. Later, if prices bounce back, the economic hit would be disruptive.

The answer is for governments to smooth prices by adjusting the tax on fuel. When prices are low, like now, a higher gas tax would barely be noticed. Almost painlessly, it would raise revenues to pay for tax cuts elsewhere -- while maintaining the incentive for energy efficiency and keeping OPEC on its heels. If and when prices go back up, governments can soften the blow to their economies by lowering the tax.

Keeping the price of gas to consumers both relatively stable and sufficiently high would give carmakers an incentive to boost investment in electric vehicles, making them cheaper and more reliable. Only about 3 percent of vehicles sold in the U.S. are electric, a number that has fallen each year since 2013. Though fuel efficiency is improving, the American love affair with overpowered pickups and SUVs is still going strong. An offsetting gas tax would help there, too.

The new oil economy will test the rulers of Saudi Arabia and other OPEC countries, and if things go badly for them, the U.S. and Europe won't be unaffected. Change as far-reaching as the new economics of oil has its risks. Nonetheless, the cartel's troubles are well worth exploiting. An OPEC crisis would be a terrible thing to waste.

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