As national policy makers strive to unfreeze credit markets and end a global financial crisis that threatens to severely damage economies worldwide, Saudi Arabia will not defend an $80 oil price, and instead will let the price of oil fall, to reduce a critical cost stress on the global economy, economists and energy traders say.

Further, despite today's more-diverse oil market characterized by dozens of suppliers, any Saudi decision to not cut production will lower oil prices, Energy Trader Jim Dietz told BloggingStocks Friday.

Saudi Arabia possesses the largest, proven oil reserves in the world. The kingdom also has the biggest, quickly-marketable spare production capacity in the world, estimated to be 1.5-5.0 million barrels of oil per day, depending on the analysis.

'Saudis will let oil price fall, a lot'

"The Saudis are fully aware of the grave situation facing global financial markets and economies. The Saudis are going to let the price of oil fall, a lot. Other OPEC members like Iran or Venezuela may call for a production cut and try to protect their interest, but it's a non-starter, an after thought," Dietz said. "The Saudis know that every stimulative tactic must be used to keep commerce moving and eliminate stress and a lower oil price is part of that solution." (Dietz added that he had no open energy trading positions, his normal stance for a Friday.)

Oil fell $6.94 to $79.65 per barrel Friday at mid-day, as a near-panic atmosphere permeated markets as stocks plunged worldwide and U.S. stock markets declined for an eighth consecutive day. At 12:05 p.m. EDT, the Dow was down 313 points to 8,265 and the S&P 500 was down 38 points to 871.

"An $80 oil price is too high for this economy. It probably was too high for any economy, but that is a debate for another time. Right now, the oil market senses that the Saudis know the price of oil must go lower to reduce financial system stress," Dietz said. "And as the Saudis go, so goes the price of oil."

U.S. consumers have another reason to worry about gas prices. Two of the largest oil-producing nations in the world are forming a military alliance, and neither nation likes the U.S.

According to The Wall Street Journal, "Venezuela's President Hugo Chávez signed new energy agreements with Russia on Friday, shortly after obtaining a $1 billion loan to buy more Russian arms."

Chavez has kicked a number of U.S. and EU oil companies out of his country as he has nationalized the industry. It would not be beyond imagination that Russia and the South American nation would use a combination of oil and guns to try to weaken U.S. influence in its own hemisphere and force America into more military spending to patrol the regions to its south.

Chavez has already begun spreading money around to his neighbors in the hope of being viewed favorably. Having a stronger military presence should help him make the case that he can keep the U.S. from using its power to push him out of his role as the most powerful political figure north of Brazil and south of Mexico.

One wouldn't call it the best week in the world for OPEC.

Once again, the world's best-known cartel has demonstrated that the coalition is not as cohesive or harmonious as a symphony orchestra.

Saudi Arabia, in confidential communications, let it be known that the kingdom would ignore the stated intent of other cartel members and continue to pump plenty of oil, The New York Times reported.

On Wednesday, OPEC announced that members would redouble effort to adhere to production quotas -- not exceed them as some members typically do -- an effort that, if effective, would be tantamount to a roughly 500,000-barrel per day cut in production, The Times reported.

OPEC's hawkish members said lower production is needed to eliminate what it believes is an oversupply in the market, and they cited this as the reason oil's price has fallen about 30% in two months to the $100-range, Bloomberg News reported. Oil closed Friday up 31 cents to $101.18 per barrel.

In the margins of Barron's this week there was a smallish note about the government of Venezuela nationalizing Cemex's (NYSE: CX) operations in that country. For some reason the government of Hugo Chavez thinks that stealing all of the private companies in 'his' country will lead to greater prosperity for 'his' people.

While it is a long journey from Venezuela to Zimbabwe, with its exponential inflation rate and a near-total economic breakdown, every journey begins with a first step. Mr. Chavez will move much closer to this inevitable outcome if he continues on his chosen path.

Motley Fool has a good write-up on the subject in which they detail the sour relations between Chavez and foreign businesses. Chavez recently offered to re-open negotiations with Cemex, but since he has already decided to take the company, that offer is suspect -- you can't negotiate with a gun pointing at you. To date, Chavez has nationalized the telecommunications industry, electricity, and oil. How many steps down the road is that? Why would anyone want to invest in Venezuela?

At this juncture, investors/readers thinking about speculating a little in oil via shares in the United States Oil Fund (AMEX: USO) or via an integrated oil company should think again.

With the U.S. stock market meandering and the nation's economic doldrums continuing, the urge can build in investors, particularly those less-experienced, to try something daring.

However, the oil market is currently in a tug-of-war between the geopolitical concern-oriented bulls and the global economy slowdown-oriented bears.

In other words, the oil market is about as balanced -- or as divided -- as it has been in about two years, so says energy trader Jim Dietz. Oil closed Friday up $1.02 to $125.10 per barrel. Oil is down about 15% from its all-time high of $147.27 registered on July 11, 2008, but is still up about 100% over the past year and about 400% since 2000.

OPEC has repeated what it has said before, but with a little twist. It will not raise supply before its September meeting. That means that relief from $130 plus crude prices may not be coming.

But, the small addition to the group's comments is that "OPEC has no plans to meet to discuss oil's surge to a fresh record, and would need to see a real supply threat to gather before the next scheduled meeting," according to Reuters.

While it is not entirely clear what that means, it probably includes disruptions of oil production in areas that have little political stability, especially Nigeria and Venezuela.

In general, OPEC says that speculation and a weak dollar are driving oil up. That is a convenient excuse for a cartel that is making hundreds of billions of dollars while gasoline prices move toward $5.

Douglas A. McIntyre is an editor at 247wallst.com.

When oil was at $65 a barrel, almost no one believed it would double. There were a few nuts making the case, but they were ignored like Galileo was when he said the Earth moved around the sun.

Now, it is hard to find analysts who do not believe oil is going to move over $140 a barrel, and, perhaps above $200. Their reasoning is sound enough. Demand in emerging nations like China and India is still increasing. While crude use in the U.S. may be off slightly, it's not off enough to matter. Supplies may be drying up as fields in the Middle East, Mexico, and Russia age. A political catastrophe in Nigeria or Venezuela could cut production.

Against all that, a case for a sharp drop in oil prices is quietly forming and its logic is powerful but poorly understood.

The first argument that oil is too high is that it has been pushed up in part by speculators rushing to cover bets that crude will fall. It is a bit like a "short squeeze" in stocks. Once the "covering" is done, oil prices will face less pressure on the upside.

American motorists, already stung by an 80% increase in gasoline prices in the past year, sense that $5 per gallon is ahead, and they may be (regrettably) right.

A CNN/Opinion Research Corp. poll found that 94% of respondents expect to pay $4 per gallon this year, and 78% expect to pay as much as $5, CNNMoney reported Tuesday.

The national average currently is $3.62 per gallon as tracked by the Lundberg Survey, Bloomberg News reported. Many higher-cost areas of the United States -- including New York, San Francisco, Los Angeles, and Boston -- are already experiencing prices over $4 per gallon.

Further, traders and analysts say seasonal, structural, and geopolitical factors are likely to push gasoline considerably higher in the weeks ahead -- with gasoline's upward arc lasting months, if the price of oil continues to rise.

Primary culprit: Rising oil prices

The biggest factor in gasoline's rise is the price of oil, which Tuesday topped $122 per barrel in NYMEX trading for the first time in its history. Oil is up more than 100% since 2006. In November 2001, oil traded at about $17 per barrel. Moreover, because the crude component accounts for more than 60% of the price of a gallon of gasoline, refiners have passed that added cost onto consumers.

Venezuela has started collecting its new foreign oil companies windfall profits tax, as part of President Hugo Chavez' plan to gain a larger share of oil company profits, The Associated Press reported.

The tax is based on the monthly average price of benchmark Brent crude oil. The tax kicks in when the price of benchmark Brent crude sits above $70 per barrel, The Wall Street Journal(subscription required) reported. If oil prices remain above that threshold for one month, the state will take 50% of the difference between this average and the final sale price of every barrel. When Brent crude exceeds the $100-a-barrel average, the rate will rises to 60%.

'21st-century socialism'

President Chavez, a Socialist, has said the tax is necessary to fund key social programs as part of his effort to implement an economic and social system he calls "21st-century socialism." Critics say the tax will slow investment and development in the oil sector, and also discourage other foreign direct investment in Venezuela.

Oil spiked up to $107 on news that an Iraq pipeline had been blown up, potentially disrupting supply. Oil-consuming nations had watched crude drop to $100 on hopes that a slowing global economy would cut demand.

In all probability, the hunger for oil in areas such as China and India will keep the need for oil high. There is also evidence that older fields in the Middle East and the Arctic are not yielding as much crude as they once did. The supply and demand dynamics may keep oil prices high for a very long time.

Oil disasters like Iraq and Katrina almost always cause a rapid rise in oil prices because of concerns that, at least temporarily, crude will be more scarce.

But, there may be a "two disaster" rule that could spike up oil prices 15% to 20%, at least for a time. Under this set of circumstances oil might be interrupted in Nigeria -- where the government is unstable, and Iraq -- where there may be more attacks on the infrastructure. Or, the head of Venezuela could cut off oil because he hates the US. If this is combined with a pipeline problem in northern Alaska, crude could take a big run.

The "two disaster" rule has not been fully tested, but the chances that it will be in the next year are increasing. The world's political scene is too volatile and the pipe and refineries that supply oil are, in many cases, too old.

Crude is going to $120. It is just a question of when and for how long.

Douglas A. McIntyre is an editor at 247wallst.com.

Oil closed above $105 for the first time in the industrial, modern, or postmodern eras Thursday, after status-quo monetary decisions in Europe and political tension in Latin America sparked both new buying of the commodity as an inflation hedge and renewed concerns about supply.

Oil, which traded at a high of $105.95, closed Thursday up 95 cents to $105.47 per barrel, an all-time record-high close.

The other major energy commodities also closed higher. Heating oil gained 3 cents to $2.97 per gallon, unleaded gasoline added 1 cent to $2.65 per gallon and natural gas climbed 3 cents to $9.75 per million BTUs.

Lawyers for the Venezuela state-owned oil company PDVSA are back in court in London. They are trying to convince a judge there that the $12 billion that Exxon (NYSE: XOM) has seized through the courts in exchange for its assets that have been nationalized is excessive.

According to Reuters, "PDVSA lawyer Gordon Pollock said the amount frozen was excessive. He said a claim that PDVSA would try to hide its assets was not credible and the English court which awarded the freeze had exceeded its jurisdiction." PDVSA's argument is based partially on a theory that the calculation Exxon has used for reparations sets the face value of its property too high.

The legal challenge from Hugo Chavez's government has one significant flaw. His country has no right to take the Exxon assets in the first place. There would be no court hearing at all if Venezuela had not violated international law.

Several courts have agreed that the $12 billion in PDVSA overseas assets that Exxon has been able to seize is based on rational calculations. If the Venezuelan government does not want to pay fair value, then it should give the property back or reap the financial whirlwind.

Douglas A. McIntyre is an editor at 247wallst.com.

Oil Friday closed up 65 cents to $98.85 -- shaking off earlier profit-taking -- after word that Turkey had launched a ground incursion across the border into northern Iraq.

It was the highest three-day print close for oil ever. Oil gained more than $3 this week and closed above $100 twice. (Oil hit an all-time high, in inflation-adjusted terms, of $102.80 per barrel in April 1980.)

Oil: bull, bear battle

Independent energy trader Jim Dietz told BloggingStocks Friday the market remains volatile and conflicted.

"What we have now is a battle royale. Oil inventories have risen for five weeks and gasoline demand is slowing. Gasoline demand is up less than 1% year-over-year, and that suggests a major drop in oil's price is ahead. Bigtime," Dietz said. "But the bulls aren't giving up. They point to Venezuela's threats to cut-off oil to the U.S., the civil strife in Nigeria that never seems to go away, OPEC's possible March cut, and now Turkey crossing the Iraq border, as bullish signs, and they have a point. So it's a pretty conflicted market right now."

Crude oil surged $2.53 to $98.03 per barrel in early trading Tuesday on a Texas refinery fire and concern OPEC will cut production at its March meeting.

A strong explosion Monday created a fire and shut off production at an oil refinery operated by Alon USA Energy (NYSE: ALJ) near Big Spring, Texas. The facility can refine 70,000 barrels of crude per day.

Heating oil jumped about 6 cents to $2.71 per gallon, unleaded gasoline surged about 7 cents to $2.56 per gallon, and natural gas rose 26 cents to $8.92 per million BTUs.

Independent energy trader Jim Dietz told BloggingStocks Tuesday that given the U.S.'s barely-adequate refining capacity, any incident in the refinery system can cause a price spike.

"There is so little spare capacity in the system, even a fire at a minor location can have traders flashing the buy card," Dietz said. "The U.S. has decided to allow new refinery construction, but the next new facility won't be ready for about 5 to 6 years. Expansions at existing refineries will provide some additional spare capacity later this year." Dietz added that he has no open daily positions, and is short oil with monthly contracts.

U.S. crude oil inventories increased 1.1 million barrels for the week ending February 8, 2008, the U.S. Energy Information Administration announced Wednesday. The statistic was below the 2.37 million barrel increase estimate.

The oil markets took Wednesday morning's inventory report in stride. Oil was down 41 cents to $92.37 per barrel, heating oil fell about one cent to $2.59 per gallon, unleaded gasoline fell one cent to $2.35 per gallon, and natural gas declined about three cents to $8.41 per million BTUs.

Meanwhile, gasoline inventories rose 1.7 million barrels and distillate stocks fell 100,000 barrels. At 301.1 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year.

Refineries operated at 85.1% of their operable capacity last week, up from 84.3% a week earlier.

Trader sees spring oil price decline

Independent energy trader Jim Dietz told BloggingStocks Wednesday the oil market is currently being driven by geopolitical events more than oil demand.