The cure for OPEC, is OPEC.
Over a barrel?
Commentary: With every cut, OPEC's power wanes
By Dr. Irwin Kellner, CBS.MarketWatch.com
Last Update: 9:56 AM ET July 27, 2001
NEW YORK (CBS.MW) -- The Organization of Petroleum Exporting Countries is once again prepared to reduce oil production in an effort to shore up prices. (See full story.) Some people never learn.
This is the third time this year that OPEC has reduced its daily output of oil. Yet instead of going up, oil prices have actually come down.
But it clearly has not benefited OPEC, whose revenues naturally fall off when the price of petroleum declines. That's why the cartel just announced another cut in output.
While OPEC does control about half the world's oil reserves, its share of oil actually produced has declined.
Back in 1973, OPEC accounted for nearly 60 percent of the world's oil production (see my column of May 18). As recently as last autumn, OPEC was producing 37 percent of total crude oil supplied to the market. Today, its share is down to 33 percent and falling.
Indeed, as OPEC's output has plunged in response to its earlier cutbacks, production of non-OPEC oil has continued to rise. That's why the price of oil has dropped more than $10 a barrel from last year's high.
It is pretty clear that OPEC has set in motion forces that will keep its revenues depressed for some time to come.
By cutting output and forcing prices higher back in 1999, the cartel weakened the U.S. and other industrial economies, thus cutting demand. At the same time, the higher price of oil made exploration and production of oil from non-OPEC areas profitable once again-not to mention other forms of energy.
As for demand, the U.S. is far more energy efficient than it used to be. Back in 1973, it took 18,240 Btus of energy to produce one dollar of real gross domestic product. Today, we can do it with only about 10,000 Btus-a whopping 45 percent less than 28 years ago.
While a spokesman for OPEC has denied trying to teach oil traders a lesson (not to build up short positions and bet on more price declines), it is OPEC, itself that needs to learn a lesson.
The more the cartel cuts oil output, the less revenues it will earn-and the less control it will have over the market.
Dr. Irwin Kellner is chief economist at CBS.MarketWatch.com and the Weller professor of economics at Hofstra University.
It's not a matter of if, but only when.
Short the rallies, and cover 1/2 the shorts on the sell offs. It's the only way to play the patch for the next 12-18 months.
Short PENG?
Jim |
