History is repeating itself, at least in the oil market. Once again, a miscalculation by OPEC -- probably motivated by greed or rational self interest carried to its logical (but foolish) extension -- has resulted in almost the same set of market conditions that resulted when OPEC made the same mistake in 1990-1991.
Then, following the Persian Gulf War in 1990, OPEC increased production only grudgingly, in an attempt to hang onto sky-high oil prices of about $55-60 per barrel. (Or about $120 in today's dollars.) The result? A U.S. recession and a consequent collapse in oil demand, and in oil's price: oil first fell below $40, then $30 on its way to trading below $13 per barrel in 1998. Thirteen dollars a barrel in nineteen ninety-eight.
Those who fail to learn from history...
Fast forward to 2007. OPEC has an opportunity to at least slow, if not reverse the steady rise in oil prices, which were then testing $90. However, despite the fact that oil shocks have preceded every U.S. recession since 1972, except the post-September 11, 2001 recession, OPEC does nothing.
In fact, as the price of oil continued to spiral to dizzier and dizzier heights, OPEC meetings served as information dissemination opportunities to blame the rising price on anything but a lack of increased OPEC production: the weak dollar, geopolitical concerns, investors who view oil as a performing asset, and so on. In fact, what OPEC was doing during this phase of the oil cycle was, yet again, testing the limits of the market: i.e., to determine the maximum price the market could bear, in order to maximize revenue for oil-producing nations. Or, in other words, OPEC members were repeating the mistakes of 1990-1991.
And the results of that misguided policy have been the same, basically. With oil at/near $100 in late 2007 -- the world's third oil shock -- the U.S. economy fell into a recession, and the global economy slowed. The financial crisis later plunged the global economy into a full-fledged recession.
However, the above is not to say that high-risk U.S. mortgages, toxic mortgage-backed securities, and flawed U.S. public policies (including energy policy) have not contributed to the recession: they have, and the recession will be deeper and longer, as a result of those policy errors.
Nevertheless, OPEC, by focusing on short-term national revenue and failing to increase production, has derailed the U.S. economy and driven it into a recession every bit as much as the bursting of the housing bubble and onset of the financial crisis have.
As a result, oil demand -- and oil's price -- will now collapse to levels no one can predict. Oil Tuesday closed down $2.32 to $47.31 per barrel.
In other words, by focusing on short-term profits, the cartel has ruined its long-term revenue structure, and much else besides. OPEC, once again, has killed the goose that lays the golden egg.
Reader Comments (Page 2 of 2)
12-03-2008 @ 10:37AM
Darrell Messbarger said...
I read, in the above comments, many theories as to who is to blame for both the ills of oil and the world economy. Well, let me make it simple for everyone.
This incident has proven that the price of oil is a result of both supply and demand. We, the consumers, have driven the price down by our understandable reluctance to waste $4.00 per gallon gasoline on frivolous use of our automobiles. We have been given a very valuable lesson here that we should put into practice. Do we want the contol of the world's economy in the hands of the oil producing countries? I don't. I doubt anyone outside of those countries would.
Let the lesson sink in. Buy an electric car, and make every effort to use electricity made by renewable sources. Move into the new millenium with new priorities that will assure our long term stability. If you buy off on what those entities with interests in oil profits tell you, we are destined for another round of this kind of economic chaos every 15-20 years - until we wise up. GET OFF OIL.
12-03-2008 @ 4:01PM
JCH said...
You buy an electric car and you solve very little.
You will be buying lithium from the OPEC of lithium.
12-03-2008 @ 10:17PM
Joshua said...
The main factor that contributed to this recession is the several years in the Irak war. The government has spent billions and billions there and now they want to make you believe it is just because the oil prices and the mortgages.
12-06-2008 @ 10:28AM
US said...
OPEC org is the cause of global recession so it should take responsibilty of today consequence with the help of global leadership to restore stability across all nations
the first step must be to control oil price under US$ 20 a barrel for the next 20 years or else OPEC as well as greedy oil producers must be punished by all mean by all nations to justify hardship sufferred by populace of all nations