Did you know that world oil production peaked in 2005, and since then has tapered off ever so slightly? (I did.) Did you know that since 2005, non-OPEC production is up, while OPEC production has declined to almost perfectly offset it? (I did not know that, until very recently.) Specifically, in 2006 non-OPEC production increased 0.47%, and in 2007 it increased 0.82%. In contrast, OPEC production fell 0.72% in 2006, and then another 1.12% in 2007. (If you're curious, you can construct the figures from this EIA chart [.xls].)
As you may have heard, oil prices have been shooting through the roof the last three years. So OPEC's behavior is rather strange, especially since Saudi Arabia is supposed to have most of the world's spare production capacity.
So what gives? One theory is that the Saudis are lying about their fields, and they are pumping as much as they can.
(BTW, you might wonder whether it really is an OPEC thing, or just individual members--like Hugo Chavez with his nutty nationalizations--throwing off the total. Nope, not according to these preliminary numbers [.xls]. Not only Venezuela, but also Iran and Saudi Arabia had drops from 2005 to 2006, and then again in 2007. Kuwait's output rose slightly from 2005 to 2006, but then fell hard in 2007. Interestingly, Iraq's went up in those last two full years, though its production had been decimated because of the US invasion. I didn't bother checking the other members of OPEC; I think this is enough to show that it's a general policy.)
Let's suppose though that the Saudis aren't lying, and that more generally OPEC consciously chose to scale back its production during 2006-07. I have a hard time coming up with a rational explanation for that behavior, based just on the economics of selling a depletable resource. I suppose if they realized that not only was there a quick adjustment in demand to the right (from China, India, etc.), but also revised their forecasts so that the rate of demand growth was permantly higher than they had forecasted in 2003 (say), then maybe their new optimal plan would lead to a reduction in current output.
But that's not the fun answer. I was talking about it with my friend today and we had somehow convinced ourselves that it made perfect sense, if you were a Middle Eastern sheik and wanted to keep the U.S. from invading your country for the next five years. I can't remember all the details, but some key observations:
* At the point when the US has weaned itself from foreign oil (whether through drilling liberalization, synthetic fuel, etc.), there won't be any reason for it to care about your country anymore. But you then will still have healthy demand from developing countries. So you don't really need to worry that $120 oil will accelerate weaning efforts by the US.
* In the meantime, the outrageous price actually makes the US more dependent on you. The US will be much less likely to bomb Iran, for example, when oil is already at $130, rather than if it were down at $75.
* Also in the meantime, you can use huge trade surpluses to accumulate dollar assets, giving you yet another means of leverage, and to buy all sorts of weapons to make it very costly for an occupation.