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Coverage of the recent fall in oil prices frequently mentions OPEC's decision to defend their market share, sacrificing price in the process. I understand how market share is important from a marketing perspective: strong brand loyalty gives a firm power to charge a premium over similar products. However, since oil is fungible, what is the benefit of maintaining market share? When I buy oil today, I don't care who I bought it from yesterday, right? What is the benefit OPEC receives by maintaining market share?

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The benefits of market share in the somewhat-fungible oil market:

  • pricing power (because OPEC is big enough to retain pricing power in the long term because they're a big % of the market. They're just choosing to not use that pricing power right now, perhaps because they're choosing to bankrupt competitors)
  • geopolitical strength

Note that there are additional explanations:

  • Saudi is one of the lowest short-run-marginal-cost producers, so you'd expect them to be one of the last to cut production, just through normal business, regardless of the other stuff
  • we know that most known fossil-fuel reserves are going to stay in the ground, so reserve-owners are now under pressure to try to ensure that theirs aren't, and someone else's are.
  • You could view the last few years as a sucker-trap: high oil prices lured in lots of investment into new production outside OPEC. An oil price below $30 bankrupts many of those new entrants, who have high debt-servicing costs and high production costs. And because of that, future investors will be much more wary, and require much higher returns
  • Saudi knew that the international sanctions on Iran were on the way to being lifted. If Saudi had cut oil production, it would have weakened its market strength (and thus also its political strength) relative to Iran upon its return to the international oil market.
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  • $\begingroup$ Thanks--your geopolitical reasons make a lot of sense. Could you expand more on pricing power? My (naive?) understanding of pricing power is that OPEC can either set a high price by limiting production, thereby losing market share, or can retain market share by letting the price drop. How are they retaining pricing power while letting the price drop? $\endgroup$ – john_stech Jan 19 '16 at 14:42
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    $\begingroup$ They return pricing power in the long run, because they're a big % of the market. They're just choosing to not use that pricing power right now, perhaps because they're choosing to bankrupt competitors $\endgroup$ – EnergyNumbers Jan 19 '16 at 15:31

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