OPEC Gets Greedy

The IEA Governing Board warned yesterday that the world’s oil supply is too low to bring prices down on any consistent basis. It “expressed serious concern that there are growing signs that the rise in oil prices since September is affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates.” The body also called on oil producers to increase output. That plea certainly includes the production levels of OPEC member states.

On May 11, OPEC indicated that global oil supply was adequate and that demand from China might well be offset by a slow economic recovery in the US. “These economic uncertainties are clouding market needs for the remainder of the year,” OPEC said. The cartel will not have a special meeting to discuss the increase of crude prices.

OPEC wants to make money, more money than it has since 2008. It is clearly willing to resist a slowdown in the global economy, and that risk may be warranted as far as it is concerned. The difference between the yield from crude at $70 a barrel and $100 a barrel is in the hundreds of billions of dollars a year.

The OPEC calculus is that whatever it reaps in profits now will sustain member nations if the price of oil does fall. The cartel may also believe that even a slackening global economy will not eliminate the high demand in developing nations such as  India and China. Oil prices may fall, if this is true, but they will not collapse.

A decision to maintain current output levels may be a sort of revenge. The price of crude dropped to $40 late in 2008. OPEC miscalculated supply then. It could have throttled back output which probably would have sustained higher prices. The lesson learned is that any drop in demand because of global economic problems in the next year can be greeted with a rapid decline in supply.

OPEC will not react to $100 oil no matter what the IEA says. It can take the windfall of money now, and decrease and not increase supply if it sees demand flag later.

Douglas A. McIntyre