(Reuters) The first response of commodity producers to a drop in prices is normally to increase production – ensuring price falls become deeper and more prolonged.
Producers attempt to make up in volume what they have lost in prices. But what might be rational for one is disastrous collectively.
Cuba’s top trade negotiator warned a conference as long ago as 1946: “We know from experience that sometimes a reduction in prices not only does not bring a reduction in production, but as a matter of fact stimulates production, because farmers try to make up by a larger volume in production the decrease in income resulting from the fall in prices.”
He was speaking about sugar, but the same response has been true for other commodities, including petroleum.
In 2015, most oil producers have responded to the slump in prices by raising output, ensuring the market remains flooded and postponing the anticipated rebalancing of supply and demand.
Russia, Saudi Arabia and Iraq have all increased production in 2015. Iran hopes to follow in 2016 once sanctions are lifted.
Combined output from nine of the world’s largest oil and gas companies rose by 8 percent in the first nine months of 2015.
Output from U.S. waters in the Gulf of Mexico was almost 19 percent higher in September 2015 than the same month a year earlier, according to the U.S. Energy Information Administration.
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