OPEC Struggles with Eroding Prices

Wednesday, October 14, 2009

Our friends in OPEC are meeting November 18th to discuss the impact of the global financial crisis on oil prices.

The decline in oil prices prompted the emergency conference. Light, sweet crude oil for November delivery fell to $86.59/B on October 9th.

In the department of "liar, liar pants on fire," OPEC announced:

It would work "to ensure market fundamentals are kept in balance and market stability is maintained."

Shukri Ghanem, head of Libya's national oil company, said that "OPEC's aim is to create a balanced market, which neither harms the producers nor the importers."

If you believe either of these statements, I know where you can buy some sub-prime mortgage loans.

Where was OPEC's interest in not harming consumers when prices hit $147.27/B on July 11th?

OPEC is interested in protecting their own well being. OPEC members abdicated market control when they abandoned the market basket mechanism to maintain prices within a price band. As the world has discovered relative to regulation of financial markets, free market conditions can produce diverse economic outcomes.

Like making money from investments when the stock market is rising, OPEC has enjoyed the free ride with higher prices. Now that these prices have fueled decreased demand and economic recession, they want to cut output to firm up oil revenues.

If the past is any indication, OPEC will not be able to influence this market. If Americans are addicted to petroleum, OPEC is hooked on petrodollars. In the face of falling revenues, what OPEC countries will be willing to cut production? Historically, reductions in quotas have resulted in cheating and competition among OPEC members for market share.

For consumers, this is good news. For oil and gas companies, this brings back memories of 1986.

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