“When you’re travelling, you are what you are right there and then. People don’t have your past to hold against you. No yesterdays on the road.” - William L.H. Moon
Thursday, September 11, 2008
OPEC reduces production. Too little too late - for them?
I’m a little mad at OPEC for reducing oil production - before I got to post my blog entry advising them to do that!
OPEC is already above production limits. And even with the new production reduction - merely 520,000 barrels/day, it STILL is above production limits, make no mistakes.
Prices have gone crashing over the past two months, dipping below 100 dollars a barrel; a 5-months low.
Were I an OPEC country, I would simply attempt to maintain as high prices as possible. Oil is a very inelastic good anyway, and demand is unlikely to drop significantly.
There are protests in Russia against fuel prices. Can we blame that on the Gulfies? Hmmm, nope. Russia is the second larger producer of oil in the world, is self-sufficient and a lead exporter. So if the prices are too high, it’s monopolistic collusion and government taxes - which, as I like to remind, represent 70% or more of gas prices in France, Britain and other countries.
And basic economics play here, too: the higher the price, the higher the supply. How? Well, more expensive fields will find it worthwhile to extract and produce.
We used to consider that $40 was the lowest price to makes extraction from sandy fields worthwhile. (from the Alaskan Tundra, for instance, it's $25).
The higher the prices, the more fields will enter the market. Think underwater oil fields in the near future.
And this new supply will entail a reduction of price, which will ultimately stabilize at an equilibrium level; until then, OPEC countries would’ve made a few extra bucks.
In a sense, it looks like we’re going into the endgame of an iterated prisoner's dilemma game: we’ll keep playing the negative equilibrium until, well, we either run out of oil or stop using it!
Of course, in real life there are other considerations. Pressure from consumers (who are the ones who have the guns, hehe); the effect of fuel on food prices; etc. And the big losers from higher oil prices are net food importers. Poor countries are suffering from the repercussions of higher oil prices. But no one cares about these guys, right?
unfortunately like everything else we like to control the quantity of oil supplied. The Markets should be flooded so prices come down. Why worry about tomorrows Oil when tomorrow might not ever come?
Why should producers flood the market when they can get a higher price for it? I can see why consumers would want to do that though, flooding the market would drive the prices totally down. (hence pressure on Saudi Arabia to increase production, Iraq, etc etc.)
No one gave a damn about the producers when oil was running for $10 a barrel. So now, well, it's only fair.
As for tomorrow never coming... I'd prefer to think that it will.
My econ prof said, joking, the best way for the US consumers to liberate ourselves from this oil addiction is for the price of oil to drastically increase (20$ and up for a gallon), that way we will be force to find alternative means of transportation. He also noted that no politician would be voted in with that platform. :) Personally, I like public transportation but the high prices of oil also creeps into other goods like food. I can always plant my own garden, I guess. :/ I am personally enjoying the thought that in Cambridge I will not have a car, and therefore, I will not complain about the price of gas there which is double the price of the US. :)
My econ prof said, joking, the best way for the US consumers to liberate ourselves from this oil addiction is for the price of oil to drastically increase (20$ and up for a gallon), that way we will be force to find alternative means of transportation. He also noted that no politician would be voted in with that platform. :) Personally, I like public transportation but the high prices of oil also creeps into other goods like food. I can always plant my own garden, I guess. :/
The US can, and actually should, restructure its tax system to shift the brunt of taxation to gas, coal and other carbons... It's perfectly possible to reorganize taxation in such a way as to hike the price of gasoline considerably without increasing the overall taxation. Of course there will be losers (as well as winners) but on a limited and local scale.
Mo-ha-med said...
Ah, finally, someone read this goddamn entry!! :)
Why should producers flood the market when they can get a higher price for it? I can see why consumers would want to do that though, flooding the market would drive the prices totally down. (hence pressure on Saudi Arabia to increase production, Iraq, etc etc.)
The Saudis are worried that the bottom may soon fall out of the demand and in fact they may be right. The global demand for oil is shrinking and it's a safe bet that if the price will stay hovering around 100$ the process will start proceeding at an accelerating rate. In fact it seems that even the recent production cut will fail to stop the price from sliding below 100$. When one is running a cartel the style of OPEC, it's important to make sure that one has a full control over the price when it starts climbing up, because otherwise one will have no control over the price when it starts coming down.
My econ prof said, joking, the best way for the US consumers to liberate ourselves from this oil addiction is for the price of oil to drastically increase (20$ and up for a gallon), that way we will be force to find alternative means of transportation.
BTW your professor is totally wrong and wildly missing the point. There is no problem with the current price of oil. It's just right if we want to wean ourselves completely from Arab oil. The US demand for oil has declined by 3% or 4% at an annual basis. There are increasing signs that people are switching to more fuel efficient cars, drive less. The migration to the suburbs has also declined as people started taking into account transportation costs. The only thing that's missing is to fix the bottom for the current price. The government should guarantee in some way that it won't let the price to get below say 3$ per gallon. But what we've got right in terms of price is more than enough if the US wants to switch to low carbon economy.
Nobody, I believe the global demand for energy is rapidly increasing, even if it is in a cyclical slowdown. The OPEC production cuts were too ridiculously small to really affect the price. Plus, neither the long term price trend - global demand, etc - nor short term speculation depend on OPEC (to be more precise, OPEC's decision are but one of a many reasons affecting ST demand).
And as for US local demand -- if the government wanted to reduce the price of gas, it would simply slash down taxes. The government has no interest in doing so.
The global demand is flat while falling in the US and a few major European economies and the US is by far the biggest oil importer in the world. The demand is only growing in Asia and the Middle East. But China may start considering cutting oil subsidies and other countries are already in the process of doing it. In the Middle East Jordan removed the fuel subsidy completely and Syrians have been cutting their subsidies too earlier this year. If China decides to move on its fuel subsidies then OPEC will soon have a hard time cutting production to stop the price falling.
In fact oil importers should better start an OPEC of their own to coordinate their energy policies. Fuel subsidies should go, let alone that if global warming is such an issue as it's claimed, then there is no justification whatsoever for having them in the first place. Neither slashing taxes in order to lower gas price in the US makes any sense if there are concerns about the future supply. This situation would not have happened if the policy were from the beginning to stop gasoline from getting too cheap.
In reality they got wrong about who should do what. The oil importers should be interested in reasonably high prices to avoid their demand getting out of hand. Oil producers should block the price from getting too high so as to avoid encouraging consumers to move into energy conservation or to switch from oil into alternative energies altogether.
The Saudis, as the biggest and most experienced producer, understand what they are doing. The rest of OPEC can't see beyond the next year.
In fact if it continues this way, the same US may well decide that enough is enough and having occasionally oil as cheap as 10$ for a barrel is not worth it if a few years later you have to pay as much as 150$. Better to have a reasonably high but stable price of 50-60$ per barrel. Businesses don't necessarily look for the cheapest price, the stability of price and supply is more important. And as time goes by Americans are getting more and more used to the current situation. SUVs are no longer in fashion.
If such a decision is reached, then the US may impose tariffs on imported oil, remove restrictions on offshore drilling (have you noticed how nicely have all these platforms survived the last storm? What's the reason to continue having such a ban now?) and start getting serious about oil shale. Global warming is proceeding nicely, the Arctic will stay ice free or almost ice free along its coastline this year for the first time in centuries. There we have got 20% of world's oil waiting to be drilled and extracted. What OPEC will do in such a situation?
What's the same Venezuela and its clown will do? The very first moment the US starts getting serious about its energy policy, the US will simply wipe this regime off the face of the earth as there is hardly any refinery outside the US that can process their low quality oil.
The Saudis are smart but fortunately for us the rest of OPEC is not.
When the price of oil skyrockets, the impacts include the following:
* skyrocketing food prices that hurt the poor people of the poorest nations most severely (very bad news)
* large flow of cash into the hands of governments such as Iran, Saudi, Russia, which have been principal exporters of extremist ideologies over the last decade (very bad news). Note: Russia no longer exports an ideology. Now it is just nationalistic. And willing to threaten Europe with cutoff of nat gas, or price hikes.
* collapse of airlines (most recently Alitalia) and other energy-sensitive companies, causing large job losses in various countries (bad news)
* "stagflation" in some economies, requiring major interest rate increases to kill inflation, resulting in severe recessions (bad news) in major countries.
* major increase in risk of war over energy reserves in the middle east and especially southeast Asia, where China, the Philippines and other countries all claim the same islands (very bad news)
* "civilized" world becomes willing to ignore the Darfur genocide by oil-rich nations in interest of oil, at least for now (very bad news)
* western nations work on conservation (a bit) and developing energy alternatives (more). Thisis the only good news here.
Hello, Nobody! oil demand is indeed rising, dragged by the Chinese and Indian growth. Plus remember we're in the summer, and fuel demand increase typically in the winter (as well as in early summer because of the US 'driving season').
Consumers do have their OPEC: it's the International Energy Agency (IEA), created in the aftermath of the (first?) oil shock.
As for consumers wanting the price to be high enough so they get off their addiction.. you have a point, but as Vertigo was saying - you can't run a political campaign on a platform like that! :) People are short-sighted (indeed, countries are) and refuse to suffer higher prices NOW.
And as for exporter countries wanting a low-enough price to deter consumers from looking elsewhere: we're past that point, in my opinion. Alternative sources should already be cost-efficient at today's oil prices.. (see all the solar, eolian, etc energy being used now).
Which is why i said in my post that we're in an endgame phase: prices will keep going high until we either run out of oil or stop using it.
Anonymous: I see your point; but I don't think oil prices can be blamed for all this. Alitalia was already in deep sh*t (being sold for peanuts to Air France-KLM!) and I don't see stagflation around here. And stagnation in Japan in the 1990s, for example, can at a time of very low oil prices. So the causality is inclear.
I agree on the increased risk of regional wars, and shutting a blind eye on Darfur (though it's more complex that this). There are more politics behind this than oil economics; i view Darfur as a replay of a cold war scene really, where a big country - China in this case - protects its satellite state against the ideological enemy (the 'west'?).
And as for exporter countries wanting a low-enough price to deter consumers from looking elsewhere: we're past that point, in my opinion. Alternative sources should already be cost-efficient at today's oil prices.. (see all the solar, eolian, etc energy being used now).
Which is why i said in my post that we're in an endgame phase: prices will keep going high until we either run out of oil or stop using it.
At the current prices they are not really competitive yet. At 200$ most of them will. At below 100$ it will take a few years. Anyway if OPEC thinks that the best way to compete with alternative energies is by stopping pumping oil, who we are to argue with them
I'm an economic consultant, perpetual expat, often lost, curious, religious, secular, illogical and hesitant.
This blog is somewhat of a travelogue, a political and economic commentary board.
Your comments and emails are both welcome and encouraged; this blog is meant to be read and it's nice to know that it is! Agree, disagree, object, discuss...
Thank you for wasting your working hours here.
11 comments:
unfortunately like everything else we like to control the quantity of oil supplied. The Markets should be flooded so prices come down. Why worry about tomorrows Oil when tomorrow might not ever come?
Ah, finally, someone read this goddamn entry!! :)
Why should producers flood the market when they can get a higher price for it? I can see why consumers would want to do that though, flooding the market would drive the prices totally down. (hence pressure on Saudi Arabia to increase production, Iraq, etc etc.)
No one gave a damn about the producers when oil was running for $10 a barrel. So now, well, it's only fair.
As for tomorrow never coming... I'd prefer to think that it will.
My econ prof said, joking, the best way for the US consumers to liberate ourselves from this oil addiction is for the price of oil to drastically increase (20$ and up for a gallon), that way we will be force to find alternative means of transportation. He also noted that no politician would be voted in with that platform. :) Personally, I like public transportation but the high prices of oil also creeps into other goods like food. I can always plant my own garden, I guess. :/
I am personally enjoying the thought that in Cambridge I will not have a car, and therefore, I will not complain about the price of gas there which is double the price of the US. :)
Vertigo said...
My econ prof said, joking, the best way for the US consumers to liberate ourselves from this oil addiction is for the price of oil to drastically increase (20$ and up for a gallon), that way we will be force to find alternative means of transportation. He also noted that no politician would be voted in with that platform. :) Personally, I like public transportation but the high prices of oil also creeps into other goods like food. I can always plant my own garden, I guess. :/
The US can, and actually should, restructure its tax system to shift the brunt of taxation to gas, coal and other carbons... It's perfectly possible to reorganize taxation in such a way as to hike the price of gasoline considerably without increasing the overall taxation. Of course there will be losers (as well as winners) but on a limited and local scale.
Mo-ha-med said...
Ah, finally, someone read this goddamn entry!! :)
Why should producers flood the market when they can get a higher price for it? I can see why consumers would want to do that though, flooding the market would drive the prices totally down. (hence pressure on Saudi Arabia to increase production, Iraq, etc etc.)
The Saudis are worried that the bottom may soon fall out of the demand and in fact they may be right. The global demand for oil is shrinking and it's a safe bet that if the price will stay hovering around 100$ the process will start proceeding at an accelerating rate. In fact it seems that even the recent production cut will fail to stop the price from sliding below 100$. When one is running a cartel the style of OPEC, it's important to make sure that one has a full control over the price when it starts climbing up, because otherwise one will have no control over the price when it starts coming down.
Vertigo said...
My econ prof said, joking, the best way for the US consumers to liberate ourselves from this oil addiction is for the price of oil to drastically increase (20$ and up for a gallon), that way we will be force to find alternative means of transportation.
BTW your professor is totally wrong and wildly missing the point. There is no problem with the current price of oil. It's just right if we want to wean ourselves completely from Arab oil. The US demand for oil has declined by 3% or 4% at an annual basis. There are increasing signs that people are switching to more fuel efficient cars, drive less. The migration to the suburbs has also declined as people started taking into account transportation costs. The only thing that's missing is to fix the bottom for the current price. The government should guarantee in some way that it won't let the price to get below say 3$ per gallon. But what we've got right in terms of price is more than enough if the US wants to switch to low carbon economy.
Nobody,
I believe the global demand for energy is rapidly increasing, even if it is in a cyclical slowdown. The OPEC production cuts were too ridiculously small to really affect the price.
Plus, neither the long term price trend - global demand, etc - nor short term speculation depend on OPEC (to be more precise, OPEC's decision are but one of a many reasons affecting ST demand).
And as for US local demand -- if the government wanted to reduce the price of gas, it would simply slash down taxes. The government has no interest in doing so.
The global demand is flat while falling in the US and a few major European economies and the US is by far the biggest oil importer in the world. The demand is only growing in Asia and the Middle East. But China may start considering cutting oil subsidies and other countries are already in the process of doing it. In the Middle East Jordan removed the fuel subsidy completely and Syrians have been cutting their subsidies too earlier this year. If China decides to move on its fuel subsidies then OPEC will soon have a hard time cutting production to stop the price falling.
In fact oil importers should better start an OPEC of their own to coordinate their energy policies. Fuel subsidies should go, let alone that if global warming is such an issue as it's claimed, then there is no justification whatsoever for having them in the first place. Neither slashing taxes in order to lower gas price in the US makes any sense if there are concerns about the future supply. This situation would not have happened if the policy were from the beginning to stop gasoline from getting too cheap.
In reality they got wrong about who should do what. The oil importers should be interested in reasonably high prices to avoid their demand getting out of hand. Oil producers should block the price from getting too high so as to avoid encouraging consumers to move into energy conservation or to switch from oil into alternative energies altogether.
The Saudis, as the biggest and most experienced producer, understand what they are doing. The rest of OPEC can't see beyond the next year.
In fact if it continues this way, the same US may well decide that enough is enough and having occasionally oil as cheap as 10$ for a barrel is not worth it if a few years later you have to pay as much as 150$. Better to have a reasonably high but stable price of 50-60$ per barrel. Businesses don't necessarily look for the cheapest price, the stability of price and supply is more important. And as time goes by Americans are getting more and more used to the current situation. SUVs are no longer in fashion.
If such a decision is reached, then the US may impose tariffs on imported oil, remove restrictions on offshore drilling (have you noticed how nicely have all these platforms survived the last storm? What's the reason to continue having such a ban now?) and start getting serious about oil shale. Global warming is proceeding nicely, the Arctic will stay ice free or almost ice free along its coastline this year for the first time in centuries. There we have got 20% of world's oil waiting to be drilled and extracted. What OPEC will do in such a situation?
What's the same Venezuela and its clown will do? The very first moment the US starts getting serious about its energy policy, the US will simply wipe this regime off the face of the earth as there is hardly any refinery outside the US that can process their low quality oil.
The Saudis are smart but fortunately for us the rest of OPEC is not.
When the price of oil skyrockets, the impacts include the following:
* skyrocketing food prices that hurt the poor people of the poorest nations most severely (very bad news)
* large flow of cash into the hands of governments such as Iran, Saudi, Russia, which have been principal exporters of extremist ideologies over the last decade (very bad news). Note: Russia no longer exports an ideology. Now it is just nationalistic. And willing to threaten Europe with cutoff of nat gas, or price hikes.
* collapse of airlines (most recently Alitalia) and other energy-sensitive companies, causing large job losses in various countries (bad news)
* "stagflation" in some economies, requiring major interest rate increases to kill inflation, resulting in severe recessions (bad news) in major countries.
* major increase in risk of war over energy reserves in the middle east and especially southeast Asia, where China, the Philippines and other countries all claim the same islands (very bad news)
* "civilized" world becomes willing to ignore the Darfur genocide by oil-rich nations in interest of oil, at least for now (very bad news)
* western nations work on conservation (a bit) and developing energy alternatives (more). Thisis the only good news here.
Hello, Nobody!
oil demand is indeed rising, dragged by the Chinese and Indian growth.
Plus remember we're in the summer, and fuel demand increase typically in the winter (as well as in early summer because of the US 'driving season').
Consumers do have their OPEC: it's the International Energy Agency (IEA), created in the aftermath of the (first?) oil shock.
As for consumers wanting the price to be high enough so they get off their addiction.. you have a point, but as Vertigo was saying - you can't run a political campaign on a platform like that! :) People are short-sighted (indeed, countries are) and refuse to suffer higher prices NOW.
And as for exporter countries wanting a low-enough price to deter consumers from looking elsewhere: we're past that point, in my opinion. Alternative sources should already be cost-efficient at today's oil prices.. (see all the solar, eolian, etc energy being used now).
Which is why i said in my post that we're in an endgame phase: prices will keep going high until we either run out of oil or stop using it.
Anonymous:
I see your point; but I don't think oil prices can be blamed for all this.
Alitalia was already in deep sh*t (being sold for peanuts to Air France-KLM!) and I don't see stagflation around here. And stagnation in Japan in the 1990s, for example, can at a time of very low oil prices. So the causality is inclear.
I agree on the increased risk of regional wars, and shutting a blind eye on Darfur (though it's more complex that this). There are more politics behind this than oil economics; i view Darfur as a replay of a cold war scene really, where a big country - China in this case - protects its satellite state against the ideological enemy (the 'west'?).
And as for exporter countries wanting a low-enough price to deter consumers from looking elsewhere: we're past that point, in my opinion. Alternative sources should already be cost-efficient at today's oil prices.. (see all the solar, eolian, etc energy being used now).
Which is why i said in my post that we're in an endgame phase: prices will keep going high until we either run out of oil or stop using it.
At the current prices they are not really competitive yet. At 200$ most of them will. At below 100$ it will take a few years. Anyway if OPEC thinks that the best way to compete with alternative energies is by stopping pumping oil, who we are to argue with them
:D :D
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