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Thursday, September 11, 2008

The Death of OPEC?

Could this be the death of OPEC?

Saudis Vow to Ignore OPEC Decision to Cut Production: “Hours after suffering a rare setback in a negotiating session at OPEC’s headquarters, Saudi Arabian officials assured world markets on Wednesday that they would ignore the wishes of other cartel members and continue to pump plenty of oil.

The late-night bargaining session ended early Wednesday morning with a surprise declaration that OPEC would cut production to shore up sagging prices. Saudi negotiators publicly endorsed that position, but then spent much of Wednesday privately spreading the word that they did not feel bound by it.”

I guess Hugo Chavez just got told and so did Iran.

“Analysts say they believe that Iran and Venezuela, for example, cannot afford prices below $100 a barrel as they seek to project power in their respective regions.”

Why can’t they survive on sub $100 dollar oil?

“Some countries are carefully managing their oil windfall, while others are spending freely with the expectation that prices will remain high.

Another group, composed of OPEC’s traditional price hawks, increasingly needs high prices to finance a wide range of social and military policies.”

Iran and Venezuela will most assuredly face serious social unrest within 12 – 24 months as the government is forced to cut social programs, raise taxes and implement inflationary policies…

“The Saudi view is that lowering prices moderately now will shore up the world economy and prevent a recession that would cause oil prices to collapse.”

The Saudi’s aren’t economically illiterate like the clowns from Venezuela and Iran. The House of Saud tends to send their sons and the political elite overseas to some of the most prestigious economic and business schools around the globe. So they understand the cross elasticity of demand, substitution and substitution effect.

The Saudi's also understand "giant global credit crunch" while Hugo Chavez never completed school and shouldn't be allowed to tie his shoes unsupervised.

The Saudi’s have definitely noticed the pick up in chatter on “energy independence”, “renewable energy” and “nuclear energy”. While they probably snicker at everything from “corn ethanol” to the PickensPlan, rather than take any chances, they’ll just let oil slip low enough to make these plans fade from public interest…

Remember, there is no actual oil shortage. Supplies and capacity are both adequate.

This brings me back to my previous post: Smashing the ‘Perpetually Growing Oil Demand Myth’.

[Hat Tip to CJ]


itrade4real said...

Great blog, and one of my daily stops.

IMO, I highly doubt OPEC will split. It's all just political foreplay, like our leaders do right here at home.

Anonymous said...

Guess Saudis’ll run out of oil before everyone else… That’s the price you pay for sending your kids to western schools.

Perplexo said...

Picking up on Anon.'s "joke", the Saudis have so much oil in reserve ( Iraq may have more - Iraq has never explored for more, they did not need to) that they can always jack up the pumping to moderate the price. More difficult for them to get the price up by cutting back, though.
Saudis are not Iran/Venezuela (or others with relatively small reserves). The latter want the highest possible price now as their reserves deplete, the Saudis want more moderate prices because they have centuries of reserves, and wish to ensure long-term future demand by not encouraging substitution because of higher prices now.
In other words the interests of the Nations which make up OPEC materially differ, and hence, differing policies and outcomes are desired by these Nations.
I'm not sure that that makes them "economically illiterate", but rather that the different circumstances of each, lead to each seeking to implement different policies.

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