For OPEC, it's cut production now, or else

Posted Feb 11th 2009 4:00PM by Joseph Lazzaro
Filed under: Forecasts, Commodities, Oil, Recession

One half expects the late, great writer/director Rod Serling to show up at OPEC's next production meeting in Vienna in March.

"Consider, if you will, the plight of OPEC, a cartel so driven by greed that they choked off the very source of their wealth and continued income. OPEC now faces a reality in which that very selfishness will continue to work against the cartel, a reality that doesn't resemble any world they've known, but one that we often find in 'The Twilight Zone.' "

Is the end of OPEC at hand? Perhaps not, but the cartel is facing its most serious crisis in more than a decade, so says economist Richard Felson.

OPEC, which has already cut production by 4.2 million barrels per day (bpd) to about 24.84 million bpd, must cut production by at least another 1.5 million bpd, or oil's steady price decline will continue, Felson said.

"There is no evidence of an increase in demand, either in the United States or in key emerging markets, so the bulk of the equation shifts to supply. Inventories continue to build, so even without another cut by OPEC, oil clearly tests $30 per barrel very soon." Felson said. Oil fell $1.16 cents Wednesday afternoon to $36.39 per barrel.

Tough decisions ahead

Despite oil's record slide from $147 last year to the sub-$40 level, as production cut by OPEC is not a simple matter. Historically, when the market has been oversupplied and the price trend is bearish, some OPEC member become reluctant to cut production, in order to maintain needed revenue to fund government spending, Felson said. That tactic to maintain revenue at all costs has historically driven prices even lower, as was the case in 1997-1999. Hence, those who assume that $30 represents a floor for oil, are assuming incorrectly, he said.

"So far, it looks like a repeat of the late-1990s market. If anything, the pressure to continue to pump oil may be greater now, given the large increase in social spending many OPEC nations undertook during the oil price boom. But the reality is that OPEC must cut production now, or else," Felson said. "If OPEC doesn't cut again, we will see prices fall into the mid-$20 range."

Oil / Economic Analysis: For investors, a lower oil price is good news for the U.S. economy. It serves as a de-facto tax cut for American motorists. Each $1 per barrel drop in oil increases U.S. GDP by $100 billion per year and every 1 cent decline in gasoline increases U.S. consumer disposable income by $600 million per year. While net-negative for U.S. integrated oil companies, low oil / gasoline prices serve to stimulate the U.S. economy - - something that would hasten the recovery in corporate revenue and earnings, and stock prices.

Of course, there are other issues associated with oil consumption (energy independence, climate change, foreign policy), but, for now, the view from here argues these must take a back seat to letting low oil and gasoline prices stimulate the U.S. economy.

Tags: gasoline prices, inthenews, NYMEX, oil prices, OPEC

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Reader Comments (Page 1 of 1)

2-11-2009 @ 4:56PM

Frieda said...

Demand and supply doesn't have a thing to do with any of it. Obama, Pelosi, and Reid have the stimulus and are free to start the 'speculating' again. Why else is oil $37 a barrel, which would put gas at about .99 cents a gallon and yet, it's $2 a gallon......And going up because of the 'stimulus' spending spree.

2-11-2009 @ 5:35PM

guerro said...

Not to mention the fact that there are more than a few oil tankers, full oil tankers, just driving around out in the ocean not coming into port to deliver the oil because supply would be even greater than it is now and the price of a barrel of oil would drop even further.

2-11-2009 @ 9:29PM

Ynot said...

Isn't it amazing that everytime there is a rebate check or tax break coming to the average american the price of gas goes up and pretty much negates the extra money. Not to mention the price of everything else. Have you not noticed the food prices have not come down even though commodities have. An eight pack of Pepsi cost what a twelve pack use too just a year ago. Maybe the government knows that the brain dead that go to public schools can't figure out how bad they are getting shafted and beleive Obama is just gonna keep giving them money. What they fail to realize is that money buys less and less. Time will tell if this plays out again. Do you get the feeling we are being played for fools yet?

2-11-2009 @ 9:56PM

dang1067 said...

Every mili-seconds I pray to the CURSING GOD to CURSE all oil Companies, OPEC to sink oil-price down to half-cents bbl and CURSE Wall Street to sink it to NEGATIVE -1,000 points.... And to cause all Wall Streeters to PLUNGE themselves from rooftops of tall buildings.... I pray, I pray, I curse, I curse, and I curse for all these mother f*ckers to get infected with horrible cancers and incurable diseases!!!! May their flesh be eaten slowly with maggots and have their bones rots very slowly!!!! I curse, I curse, and I curse to PLUNGE Wall Street to NEGATIVE -1,000 points, and to sink oil-price to a worthless half penny!!!!

2-12-2009 @ 8:39PM

Darin said...

I have to disagree with some of this article.......low oil prices will have no effect on this economy whatsoever.....as long as fuel prices stay high like they are.....the cost of fuel right now is manipulated by refinery output and the bidding war they created for their wholesalers for the available gas on the market.....oil could drop to $5/ barrel and no effects will will be felt by the American consumer because gas prices will still be high from this manipulation.... as long as gasoline is over 1.75/ a gallon...this recession will continue and no growth will be seen as we consumers are once bitten, twice shy about the $4/gal fiasco of last yr...and will keep our wallets clamped shut until the government steps in and does something about this price manipulation (which will never happen)