Oil's tipping point

If the safety margin disappears, and oil shortages appear in some markets, Langan says "oil-producing nations will then know that even modest decreases in production will lead to large price increases, increases of $5 or even $10 per barrel per day." At that point, he said, "oil producers could earn more revenue by producing less oil."

Here's a simplified example: Country A produces 4 million barrels of oil per day at $110 per barrel for $440 million in daily oil revenue. But Countries A, B, and C know that with a production cut of 200,000 barrels each, oil's price will jump to roughly $125 per barrel. Country A's revenue with the new lower production level? $475 million in daily oil revenue.

One classic critique of the above scenario argues that that much pricing power would not occur, if other oil producers enter the market and increase production / make-up for the shortfall. The problem with the critique is that it's moot, given current global production conditions: except for OPEC, every oil producer has been selling all the oil that it can get out of the ground, Langan said. That's not to say, Langan adds, that every oil producer has been producing to its potential. Many, such as Iraq and Venezuela could produce and sell much more oil, if badly needed oil infrastructure repairs are made. But the argument that there's "plenty of spare oil sitting around ready to fill any cutback, is not the current market reality," he said.

Still, others counter that oil prices won't jump that much with a cartel's decision to decrease production. Langan disagrees, arguing we're rapidly approaching a level of unprecedented pricing power. The evidence appears to be mounting in favor of Langan's thesis. "Have you noticed what happens to the price of oil with one report of an attack on a pipeline in Nigeria or Iraq? It bolts $2-3," Langan said. "Now think about what would happen if 4 or 5 oil producing nations reduced production by 1 million barrels total, and then by another 1 million barrels."

Another school argues that oil producers, including members of OPEC, would not drive the price of oil higher due to its negative impact on the global economy. "Perhaps this school hasn't followed the price of oil and the behavior of OPEC in the last 5 years," Langan noted. Here again, recent evidence is not good news for oil-consuming nations. To-date, OPEC has been willing to push oil's price to the limit to get the maximum the market will pay, regardless of its impact on global growth, let alone on the U.S. economy. OPEC has known for decades what a sustained, $100 oil price would do to the global economy. Still, when the major price run-up started two years ago, OPEC did not increase production.

Options for consuming nations

The remaining options for oil consuming nations, and in particular for the high-oil-consumption United States? Conservation, technology that increases engine efficiency and vehicle fuel miles per gallon, and the introduction of oil substitutes (including renewable energy sources), Langan said. To-date, the U.S. has been slow to implement these changes, Langan notes, "and that needs to change."

Concerning the west, in general, Langan has underscored the need for an OPIC - - an Organization of Petroleum Importing Countries group - - so that developed and developing world nations can regain control over pricing power via reduced consumption targets. Langan says the United States and the European Union must lead this effort, but he welcomes participation by emerging economies, such as China and India, among others.

"The 10-year trend in the price of oil is telling us the west needs to take back control over consumption, soon," Langan said. "If it doesn't, oil producers will have unprecedented pricing power. And then they'll really have us over a barrel."