Vladimir Putin must be unhinged. Just a few months ago he was able to wage war on his neighbor and threaten the West by saying that he would withhold his vast supply of oil while conducting war games with Huge Chavez of Venezuela.
Suddenly, the nations hungry for oil have fallen into recession. Recent data from China indicates that oil imports there hit unprecedented lows in November. So little crude is being used in the US that there is talk of gas prices going back to $1.
Putin has decided that he may marry up with OPEC to set and hold a significant cut in oil production to move prices up. He cannot support his military and economy with crude at $40. Venezuela and Iran are heading for economic ruin because their national incomes have dropped so much. According to The New York Times, "Faced with falling oil prices, Russia is preparing to announce that it will work with the Organization of the Petroleum Exporting Countries to coordinate a reduction in output."
Between Russia and OPEC there is 50% of the world’s oil supply. These countries are angry that production cuts in September did not take hold and increase prices. As a matter of fact, to add insult to injury, they dropped.
The next OPEC meeting pits the complacency of oil consumers against the desperation of the oil producers. Commodities inflation is not a "front burner" issue during a big recession. Falling crude prices are at the core of the economic health of Russia and the OPEC member states.
Desperation trumps complacency nearly every time. There is a notion that demand for oil is falling so fast the no level of production cut will stop it. Taking that view is remarkably naive. OPEC is talking about pushing the supply of crude down by two million barrels a day. It is nearly a sure thing that, if this step does not work, the next cut will be another one million or two million barrels.
The price of oil is going up. It may even rise 60% or 70% in a relative short time. Russia can’t afford to live without that.
Douglas A. McIntyre
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