Monday, September 17, 2007
They are just now figuring this out?
Sheikh up
Sep 13th 2007
From The Economist print edition
BY BOOSTING their output of oil for the first time in two years, the members of the Organisation of the Petroleum Exporting Countries this week finally signalled that the oil price, at nearly $80 a barrel, has gone high enough. This time last year, by trimming its output, OPEC indicated that it did not want the price to fall below $60 a barrel. Will the cartel be able to keep the oil price confined between this lofty floor and even higher ceiling—and if so, what is the outlook for the world's energy supply from OPEC's new penthouse?
Abdullah al-Badri, OPEC's secretary-general, explained that the group had decided to open the taps at its summit in Vienna out of compassion for cash-strapped drivers around the world. “Our message to consumers is that we care,” he told the press corps. But consumers who recall the earlier part of this decade, when the price vacillated between $20 and $30, are presumably not overwhelmed by the cartel's compassion.
The difference between now and then is OPEC's discovery that booming places like China have a seemingly unquenchable demand for oil. Oil producers, including those in OPEC, struggled to keep up. Prices rose, but demand kept on increasing too. By last summer, OPEC was already pumping as much oil as it could, and markets were fearful that hurricanes in the Gulf of Mexico or a political storm in the Persian Gulf would lead to shortages. The oil price duly rose to over $77 a barrel.
When those fears dissipated, it became clear that there was enough oil to go around after all. But by then, OPEC had developed a taste for $70 oil. So it cut production to stop prices from falling too far. When the oil price reached a new record of $78 a barrel last month, it was thanks as much to OPEC's diminished output as to runaway demand. The cartel has now proved that it has enough discipline to prop up prices by restraining supply if need be, and also enough spare capacity to temper prices when they rise too high for its liking. In other words, OPEC is back in control of the oil price.
This contains a grain of good news. Had a Katrina-like hurricane or a conflict between America and Iran destroyed lots of rigs last year, there would have been no one capable of compensating for the lost production by pumping more. Now, at least, oil consumers can go cap in hand to the likes of Saudi Arabia, as Samuel Bodman, America's energy secretary, did before the OPEC meeting.
But for all Mr al-Badri's magnanimous talk and Mr Bodman's pleading, do not expect OPEC to grant the world's drivers much respite. Several of its members, including Algeria, Iran and Venezuela, argued against higher quotas on the grounds that global financial jitters and an incipient economic slowdown in America might lead to lower demand for oil, just as OPEC was increasing supply. In the end, the cartel resolved to raise its output by only 500,000 barrels per day, or less than 2%, although the increase comes in addition to the 900,000 b/d its members are already pumping in excess of their quotas. The extra supply did not dent the price at all; in fact, the oil price hit new records following OPEC's announcement.
Ignorance of the law
That should worry OPEC's hawks more than it appears to. They seem to think that the world economy's ebullient growth over the past few years in the face of rapidly rising oil prices proves that it has developed immunity to oil shocks. The Chinese economy, for one, consumes more oil relative to its size than America's, but it is still galloping along. Americans, for that matter, show no inclination to buy less petrol even at prices over $3 a gallon.
Yet the laws of economics have not suddenly been repealed. Dearer oil will cut economic growth. Over the longer term, consumers respond to higher prices by driving more efficient cars and substituting other fuels for petrol. America's romance with gas-guzzling sports-utility vehicles appears to be fading and its affair with biofuels is ever more passionate. At the same time high prices are bound to constrain demand, and unpredictable economic growth and Middle Eastern politics make the future of both demand and supply uncertain. OPEC may appear to have regained control over the oil price, but it's not likely to last.
They are just now figuring out that a disciplined cartel of major producers can effectively control oil prices?!?!?!?!?! Maybe they had to spend the last 8 years studying at the London School of Economics to figure this out? Or maybe they just learned the hard way after at the beginning of this year making the silly prediction that Venezuela was reaching the "bottom of the barrel" as oil prices were likely to decline?
Regardless they could have just asked Chavez years ago and he would gladly have explained to them the importance of OPEC and how as long as there weren't major quota busters in it (read: the Venezuelan opposition running Venezuela) OPEC could effectively control prices. He sure knew better. When the corrupt old management was destroying PDVSA and destroying Venezuela with their corrupt and self-serving desire to ramp up production and bust quotas he saw right through it:
If you want a good reason or two why OPEC is on its last legs, talk to Luis E. Giusti. Few executives have done more to change the global oil industry outlook than the 54-year-old president of Petroleos de Venezuela (PDVSA), the second-largest oil company in the world. Since 1990, Giusti has spearheaded an ambitious policy to open the state-owned monopoly to private companies and to ramp up oil production.
Giusti sold the opening-up despite deep-rooted nationalistic opposition to such a move. He accomplished this by making it a significant part of a broader vision for assuring Venezuela's future as a strategic global oil supplier. His aim: to double production over the next 10 years, to around 6 million barrels daily. Garrulous and candid, Giusti mobilized support with a campaign of talking to ministers and politicians, lobbying congressional committees, making speeches, and writing articles. Today, dozens of foreign companies are drilling in Venezuela's prolific oilfields.
While fears are increasing that economic distress will lead to backsliding from free-market policies, Giusti's reforms in the oil industry are likely to survive any backlash--and to serve as a successful benchmark for oil openings that are under way in other countries such as Brazil.
Populist former coup leader Hugo Chavez, the front-runner in Venezuela's presidential election campaign, promises to fire Giusti and to ''review'' the deals with foreign companies.
Chavez was true to his word, immediately fired Giusti, survived a PDVSA manager strike and... here we are with oil selling for almost 10 times what it sold for before Chavez came to office (btw just for laughs read this where Caldera's energy minister said that Venezuela should not respond to low prices by cutting production - thank god he got fired too!). The people who write for the Economist might not know much about the economics of oil, but thankfully Chavez does.
Of course, the sad reality is despite all the empirical evidence of the past 8 years most of the Venezuelan opposition doesn't get this. Rest assured if Borjas, Rosales, Petkoff, or any of the other clowns were president Venezuela would be back to its quota busting ways, its government would be broke, and oil would be somewhere south of $20 per barrel.
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