Skip to comments.What If They Gave A Cartel and Nobody Came?
Posted on 12/18/2008 5:27:59 PM PST by .cnI redruM
Its official! OPEC will cut oil production by 2.2m Bbl/day in real terms. So far, this hasnt re-inflated the price of oil. In fact, the current price on a Bbl of Light Sweet Crude has reached $40.06.
Thus, despite a reduction in global production from the cartel controlling 40% of the worlds proven reserves, the price of oil fell 8%. This would remind Sherlock Holmes of the dog that wouldnt bark. This drop in oil prices particularly baffles in the face of a collapse of value in the US dollar. Economist John Kemp offers his prognosis on the current health of Sams dollar.
Like the sorcerers apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control. Now the Feds decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.
So given the Herculean efforts of US policy-makers to extend and improve OPECs leverage against our national economy, why havent commodities allowed hedge fund managers to rise from the dead and strike up the Tennessee Waltz? Maybe commodities arent such a viable hedge against Sams currency after all.
Or maybe, with the supply side of oil prices being ratcheted by OPEC and poor US Fed policies, it would seem the demand side of the oil price would have to be reenacting Glorious Dunkirk to bring about the current state of equilibrium. AP writer Chris Kahn seems to have identified data trends that support this hypothesis.
"There's just so much oil in inventory out there right now," said Michael Lynch, president of Strategic Energy & Economic Research. "Nobody wants to buy this stuff."
Crude prices have fallen so low, producers have leased supertankers to store the oil at sea, hoping that oil will rebound.
U.S. gasoline inventories continued to rise, the government reported, providing further evidence of a major pullback by American motorists.
Demand for gasoline over the four weeks ended Dec. 12 was 2.7 percent lower than a year earlier.
Yet that only partially explains why OPEC receives the condign drilling. Not only has Christendom said Merry Christmas to the OPEC nations by not buying their products, non-OPEC nations have also bailed on making sympathetic cuts in their own production. Russia and Norway have been asked to help out. Russia sent an observer to the last OPEC meeting.
Norway has elected to demur. Their production costs remain low. These oil prices arent great for Norway, but dont reach the point on the Theory of The Firm cost curve where anyone needs to shut their doors. A spokesman for Norways sovereign oil firm describes the set of conditions that render OPECs request less than beneficial to Norway.
I dont think Norwegian authorities are thinking of a production cut at all this time around, said Toerstad of StatoilHydro, Norways largest oil and gas company. Production costs on the Norwegian continental shelf are roughly $15 a barrel, she told a seminar today in Oslo.
And furthermore, OPECs problems also extend to internal problems over who should be made to actually cut production to make the policy work. Barclays Capital points out different OPEC nations, will have to sacrifice differing levels of production, to meet the cartels quota. The table below lays out who has to cut how much. (HT: FT Alphaville)
OPEC Output Reduction Quotas by Nation
Two observations spring immediately to mind. The Sunni Nations of Saudi Arabia and Kuwait are under less production constraint than Shiite Iran. A part of me wonders the extent to which this outcome was accidental. Saudi Arabia and Iran only work together when they have to. They are allies of necessity, glaring at one another with a deeply held religious antipathy.
The Persian Gulf states of Saudi Arabia, Kuwait and Iran were 1st, 2nd and 4th in terms of having to make the smallest cuts in production. African and South American members; to include Angola, Venezuela, Nigeria, and Libya respectively fared far worse. These nations bore the 7th, 6th 5th and 3rd easiest burdens respectively. Its a good thing that only Americans and Western Europeans have enough of a privileged position to be racists. Otherwise, I would forced to believe the worst about the most powerful OPEC countries.
Saudi Arabia and Kuwait are the only two nations required to cut production by less than 10%. This will bare notice and breed great resentment. They apparently learned nothing of value from the First Gulf War. It is these fundamental imbalances that will ultimately lead OPEC to hang separately, rather than together, as the global economy gets worse than OPEC has ever seen it before.
Didn’t hear them panicking and holding emergency meetings when oil was spiking upward to 147 a barrel.
Ain’t it just too bad....
Once the prices start to drop as they have the ability to control the drop disappears for years.
In 1981 the Saudis targeting driving the price down to $20 bbl. It went to $10 bbl. The present situation is more out of OPEC’s control. We need to act to keep it that way.
i dont care what anyone says these oil prices are being manipulated down by gov control to bankrupt these middle east countries and hugo and put immense pressure on russia. and soon opec will be fighting each other!
It would be nice if we were that astute and competent as a government, but it’s more likely that if it is being done, it is being done by shrewd private operators.
It seems that this low price of oil, while giving our economy a sever headache has afflicted our enemies with something like congestive heart failure.I would like to think it is a stratagem of the war but somehow I don’t think that is the case. At our end, the economic downturn would have caused a little twinge but the Economic Experts in Washington are going flat out to convert a classic economic Panic of a couple quarters’ duration into the Great Depression redux by dragging us into Socialism so that everyone(sub-elite of course) can live in equality somewhere below the tenth economic percentile of a couple of years ago.