The Triumph of OPEC

[Ladywriter 7,783]

For nearly half-a-century, the organization has been a cartel in name only. Now it may be the real deal.

Mar 7, 2008 | Updated: 4:10 p.m. ET Mar 7, 2008

For much of its 47-year existence, the Organization of the Petroleum Exporting Countries (OPEC) has been a cartel in name only. It could not, in practice, control oil prices because many of its members regularly breached the production quotas that were intended to regulate the market. So OPEC generally followed oil prices up and down, as supply and demand conditions shifted. But now OPEC may be the real deal: a cartel that works. If so, that's bad news for us.

Look no further than last week's OPEC meeting in Vienna. Oil ministers declined to increase production despite a fairly obvious case for doing so. Not only were oil prices fluttering just above $100 a barrel, but the United States is either in or near a reces*sion and much of the rest of the world faces a noticeable econom*ic slowdown. The OPEC ministers were unmoved. Indeed, they indicated that they might actually reduce production if weak de*mand—presumably reflecting weak economies—threatens to de*press prices. Not good.

What's wrong is that a fall of oil prices is one of the mecha*nisms by which a recession or economic slowdown corrects itself. Lower prices for gasoline, home heating oil and diesel fuel improve consumer purchasing power. They muffle inflation and in*crease confidence. In this sense, they're an important "automatic stabilizer" for a faltering economy. If the automatic stabilizer is disarmed—or, worse, transformed into an automatic "destabiliz*er"—then the slowdown or recession may get worse.

Oil producers don't much care. High prices have been good to them. Since 1999, annual oil revenues for OPEC countries have more than quadrupled, to an estimated $670 billion in 2007, says energy economist Philip Verleger Jr. What's less clear—to ex*perts, at any rate—is whether OPEC has merely benefited from good luck (tight oil markets) or has acted as a true cartel, restrict*ing output and raising prices. The right answer is: both.

Of good luck, there's little doubt. Two massive oil miscalcula*tions both aided OPEC. First was a widespread underestimate of world demand, especially from China. Since 1999, China's oil use has almost doubled, to 7.5 million barrels a day (mbd) in 2007. (In 2007, world oil use was 86mbd, up 13 percent from 1999. American oil use was 20.8mbd, up 7 percent.) Second was an overestimate of supply. War, civil strife and nationalization have depressed production in Iraq, Nigeria, Iran, Venezuela and elsewhere. Total global capacity might be 4.5mbd higher with*out these setbacks, says the Energy Policy Research Foundation (EPRINC), an industry research group. The combination of higher demand and stunted supply has pushed up prices.

But that's only the half of it. Go back to late 2006. Crude prices were slipping from about $70 a barrel in August toward $50 a barrel (a level that, a few years earlier, seemed astronomi*cal). A true cartel would cut production to prop up prices. That's what OPEC did. In two steps, it reduced oil output by about 800,000 barrels a day, notes economist Larry Goldstein of EPRINC. "By July, 125 million barrels of oil inventory had been wiped out," he says. At the end of 2007, inventories (measured by days of supply) were at their lowest point in three years. Prices rose. Without OPEC's supply cuts, they wouldn't now be at $100 a barrel.

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[Mathias 426]

In my opinion, America should harvest its own natural oil reservoirs to avoid dependence on foreign oil and until environmentally safe options are more economical.

[Ladywriter 7,783]

America has enough environmental problems due to climate destabilization. Any new drilling isn't a solution its a band aid over a huge gash that needs 40 stitches