The observations made by the poster are good. There has been a perception down through the years of the short sided actions cited by the poster. That perception has had a lot of support in the actions of OPEC. Based on these past actions, many dismissed the latest cut backs started earlier this year.
These expectations of eventual cheating were proven wrong and we saw the price of oil rise from around 10-11 to over 25.
What happened?
The big difference this time was two fold. First of all, the down draft in oil consumption due to the Asia flu was not as large as perceived. If my memory serves me right, the overhang in excess production was only 3%. However, the paper barrel traders in NY were able to short the price of oil with options and literally triggered a panic in selling. The rest is history. It really didn't take much of a cutback in production to get the prices rolling the other way.
Secondly, all of the OPEC countries must have the income generated from the oil sales or they have serious social problems. The largest producers are countries with authoritarian rulers, the most unstable form of government. They placate the populace with goodies supplied by the petrol dollars. When they saw those revenues come down with the price of oil, they had a lot of motivation to do something.
The big surprise this year was the close cooperation supplied by Mexico and Norway. These two countries were the swing producers and they wanted to go along with OPEC. All of the coordination and planning was done over emails, phone conversations, and small private meetings with the oil ministries involved. This low key approach was completely missed by the media and contributed to the surprise of a successful execution of the cutbacks. I suppose we all became accustomed to the big deal meetings of OPEC in Vienna a few years ago. The media assumed if there were no big meetings, then there were no big deals.
The other advantage of the face to face meetings to the OPEC and other countries was it facilitated trust between the decision makers. It's one thing to deal with a committee; it's an entirely different matter in talking with an individual. Evidently, the personality of the Mexican minister played a big part in encouraging the others to cooperate. There was a big write up on him a couple of months ago in the NY Times.
It all worked. This has encouraged the countries involved to pursue this policy of cooperation. They've seen their revenues more than double.
So what does the future hold?
1 - Good environment for continued price escalation due to recovering Asian and European economies.
2 - OPEC and others have been encouraged to continue cooperation. This may include some production increases, as it is not in their interest to see oil too much higher than 25. At that point, others begin to develop their oil resources, to OPEC's detriment. That may be the innocent explanation for Iran's comments.
3 - There is only about 5 million barrels per day in excess capacity worldwide. Within the next two years world demand will exceed that capacity. Then OPEC really will have control of world oil prices.
4 - Sometime in the next five years, depletion is going to start having a major impact on productive capacity. All the talk in the world about improved technology for finding and exploiting oil reserves will do nothing to change the simple fact that oil is a finite resource. At that point, there will be talk of using the tar sands of Alberta and the oil shales here in Colorado. But the era of cheap oil will be past.
Notice I said of cheap oil, not of oil. Oil will be had but at a price. We may be looking at $50 oil within five years.
Of course, a major recession world wide will delay this. But it will not be cancelled.
Just some thoughts.
Regards,
Jack Simmons |
