Weekly Geopolitical Report – Reflections on 1986 (February 2, 2015)

by Bill O’Grady

Since last summer, oil prices have suffered a precipitous decline.  The weakness is mostly due to supply and demand factors; however, because oil is a market with an active cartel, the decision by the cartel leader, Saudi Arabia, to allow prices to decline is also a key factor in price weakness.

This isn’t the first time the kingdom has fostered a price breakdown.  There were two other episodes in which the Saudis led oil prices lower.  In 1986 and 1998, the kingdom boosted production and allowed prices to decline in a bid to maintain its market share.

In this report, we will focus solely on the geopolitics of the 1986 event.  The analysis will begin with the basic economics of oil and cartels.  From there, we will detail the history of the kingdom’s decision to abandon OPEC’s price targets in 1986 and the geopolitical fallout that emerged in the coming years.  We will compare and contrast the 1986 situation to the present situation.  As always, we will conclude with potential market ramifications.

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