OPEC’s Enigma

OPEC elected to continue production at its current level, at least until May. The announcement was an unexpected result of the cartel’s meeting in Vienna.

There was no consensus among analysts about why OPEC did not try to increase prices. A number of member nations and oil producers from outside OPEC have said that if crude stays below $70 a barrel they cannot balance their national budgets and will face increasing deficits. Iran and Venezuela are the most vocal among these nations.

The price of oil has moved back toward $50 because there was no support from the OPEC production announcement With extremely modest economic news from the US that shows that the rate at which its economy is deteriorating may be slowing and more comments from China that it can reach its 8% GDP growth target for the year, crude traders have been willing to bet that demand may strengthen over the next several months.  This could decrease the chance of an OPEC production cut in May.  The theory has the benefit of seeming reasonable, but it is not supported or undermined by any body of evidence.

It may be that OPEC has decided to take one for the global economy and help keep prices low so that the recession does not last until 2010 or beyond. If that was the basis of the decision, it was made on the behalf of self-interest. A long downturn will hurt OPEC members as much as oil consuming nations. If the cartel acted on that basis, it may be the first time in memory that it decided to look more than a year ahead.

The most likely reason that OPEC said it would not cut production but would only enforce past production cuts is that the largest members of the cartel, lead by Saudi Arabia, can afford to try to stimulate the economies of the West, Japan, China, and India without significantly hurting their own financial prospects short term. If so, it means the Saudis have decided to ignore Venezuela and Iran.  We may never know why.  Perhaps Saudi Arabia has come to treasure its relationship with the US more than it used to, or, more likely, it is afraid, like the Chinese are, that a colossal collapse of the American economy would wound the financial prospects of the entire world deeply and for several years.

OPEC has taken a new tack.  And the fascinating thing is that no one outside the cartel knows why.

Douglas A. McIntyre