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Page added on November 29, 2014

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Is OPEC A Toothless Tiger?

General Ideas

OPEC MET THIS WEEK and decided not to cut the oil production quotas of its members. Petroleum prices took a hit. But don’t be deceived. OPEC’s impact on prices is grossly exaggerated. Speculators believed OPEC would magically pull a rabbit out of the hat. But OPEC doesn’t even have a hat, much less a rabbit.

OPEC controls little more than one-third of the global output of oil. Production is surging in the U.S., to the consternation of the Obama Administration, which hates all carbon sources of energy. Fracking has made ultracheap natural gas plentiful, which is an alternative in some uses of oil. Once we elect a new President, the process for obtaining licenses to build terminals for exporting natural gas will speed up, which, in turn, will spur more natural gas output. Moreover, Obama’s foot-dragging in issuing permits for oil and gas exploration on federal lands will also be reversed. All this will spell more output and more downward pressure on oil prices.

Another downer OPEC is powerless to affect is the sluggish global economy—which means less energy demand.

But the biggest factor in the pummeling of petroleum prices—as of now, down 30% this year—is the strengthening dollar. For decades the ratio between the price of oil and that of gold was relatively stable: roughly 12-to-14 barrels of oil to one ounce of gold. This could vary, but didn’t for long.

However, when the U.S. began undermining the gold standard in the late 1960s, which weakened the dollar, oil prices began moving up. Washington torpedoed the gold-based Bretton Woods international monetary system in 1971. The 1970s were a miserable decade of inflation, with the price of gold soaring from $35 an ounce to over $500 (it peaked briefly in 1980 at $870). Concurrently, the price of oil surged from $3 a barrel to nearly $40. Experts blieved a climb to $100 or more was inevitable.

Then President Ronald Reagan and Federal Reserve Chairman Paul Volcker decided to kill inflation—and succeeded. The price of oil plunged to almost $10 a barrel before stabilizing in the $20-to-$25 range. From the mid-1980s until the early part of the last decade the price of a barrel of oil averaged a little more than $21.

Alas, in the early 2000s the Fed, with the connivance of the Treasury Department, began devaluing the dollar in the mistaken belief that this would help pull the U.S. economy out of recession and, at the same time, boost exports. Gold began a massive upward surge, as did other commodities, including oil.

LESSONS

–Unstable money corrupts prices. Prices are supposed to tell us what consumers want and don’t want. When the price of oil went up in the 1970s, people thought this meant we were running out of the stuff. After all, don’t surging prices indicate there’s a shortage? In normal markets, yes; but when a country’s currency is weak, no. We saw the same phenomenon after 2002. Worries about resource shortages, especially oil and—until the fracking revolution—natural gas, led to, literally, hundreds of billions of dollars being forcefully directed by government into energy alternatives, such as windmills.

–The Federal Reserve and other central banks don’t know what they’re doing. The Fed doesn’t want a strong dollar. One purpose of quantitative easing (QE) was to create inflation. Too many economists, including those at the Fed, still cling to the myth that inflation stimulates growth. Now policymakers are aflutter over deflation. This must be the first time in the long history of currency debasement that governments couldn’t engineer a period of inflation, a perverse low in government incompetence!

What this means is that the strong dollar may not last and that the Fed will eventually blunder into a new disaster.

–OPEC’s growing impotence won’t stop its members from meeting or the media from taking OPEC’s pronouncements with the utmost seriousness. Wise observers will ignore the charade and instead focus on the dollar price of gold.

Forbes



22 Comments on "Is OPEC A Toothless Tiger?"

  1. Plantagenet on Sat, 29th Nov 2014 5:42 pm 

    KSA set out to collapse oil prices to drive US tight oil producers out of business. So far they’ve collapsed oil prices exactly as planned. OPEC may be a toothless tiger, but KSA is pretty darn powerful.

  2. Speculawyer on Sat, 29th Nov 2014 6:13 pm 

    Yes, OPEC is completely toothless. They can’t agree and even if they do agree, most of them cheat on their quotas.

  3. Makati1 on Sat, 29th Nov 2014 7:14 pm 

    Another Capitalist rag spouting anything that will sell subscriptions and advertising while supporting the “exceptionalist” propaganda. It does backtrack a bit at the end. “What this means is that the strong dollar may not (will not) last and that the Fed will eventually blunder into a new disaster.” (My edit) Time to unhook the USD from oil.

  4. rockman on Sat, 29th Nov 2014 7:37 pm 

    “So far they’ve collapsed oil prices exactly as planned.” So the KSA’s clever plan is to give up $100+ billions in revenue over the next 12 months if oil averages $30/bbl less than it had been. I wonder what the KSA will be getting for that price? Let’s see…they lose the financial incentive to replace their declining reserves. Hmm…I don’t think so. They prove to the world they have the power to maintain high oil prices. Hmm…that plan doesn’t seem to be working. OK…the KSA plan is to force OPEC members to finally become a true cartel and collectively reduce their oil exports. Hmm…so far that’s a bust.

    I know: they want to force US shale players to reduce their production. That plan has surely backfired: to maintain the max cash flow they need to survive those producers will have to squeeze every bbl out they can. US oil producers appear to be as uncooperative as all the OPEC countries when it comes to reducing production.

    No…no…that’s not it. I know now: it’s to destroy the US oil patch so years down the road it’s unable rebound from $70/bbl oil once economies recover and OPEC starts reducing production…unlike they are so cleverly unwilling to do today. Such devious devils: who would suspect OPEC would voluntarily give up over 1/2 $TRILLION in revenue per year with a $30/bbl decrease in price. And so clever to know the same US oil patch that was able to rebound from $18/bbl oil in the late 90’s bringing many tens of $BILLIONS to bear and create the greatest surge in US oil production would then be unable to recover from $70/bbl and create another surge. It’s not as if the same shale formations and technology will still be available then. Hmm…now that I say it out loud I’m not so sure.

    Ooh, ooh…I know why: the KSA wants the world’s oil burners to increase their consumption of OPEC’s finite oil reserves at a lower price. That way they can deplete their reserves as fast as possible for as little revenue as possible. And thus the KSA will finally unburden itself of the responsibility of supporting its baby booming population while providing more incentive to radical religious groups that have long wanted to overthrow the gov’t.

    Yep…the plan is so obvious. LOL.

  5. John Symons on Sat, 29th Nov 2014 8:11 pm 

    Spot on, Rockman

  6. Plantagenet on Sat, 29th Nov 2014 8:53 pm 

    @Rockman

    How exactly has KSA’s plan to bankrupt US shale oil producers “backfired.”

    Do you really think US producers are going to spend $75 in E and P costs to drill and frack tight shales and produce $65/bbl oil?

    Do the math. Hahahahaha!

  7. Dredd on Sun, 30th Nov 2014 4:57 am 

    “Is OPEC A Toothless Tiger?”

    If they leave bite marks you have your answer.

    It isn’t whether the bitten like being bitten or not that determines the answer.

  8. Makati1 on Sun, 30th Nov 2014 8:48 am 

    Plant, you are on the right track I think. The oil career guys cannot believe that the “alternate” sources will die a permanent death if the profits don’t continue to fill the investors pockets. If shale oil and tar sands were profitable at $60, why did it not happen until they reached the $90 mark? And what would 4-5% loan costs (or even 2% more than today’s) do to their huge debt load? THAT too is coming. That or a total economic collapse which will take them down anyway.

  9. Kenz300 on Sun, 30th Nov 2014 10:02 am 

    Reading FORBES is like anything on Faux Noise….

    They are both spokesmen for the top 1%, the fossil fuel industry and the RepubliCON party……..

    Anything they write has to be viewed thru their agenda filled lens……..

  10. rockman on Sun, 30th Nov 2014 10:25 am 

    P – “How exactly has KSA’s plan to bankrupt US shale oil producers “backfired.” You got it backwards: it was the plan of US shale producers to financial damage OPEC. The lower oil prices created by the US production surge has the potential to cost OPEC $TRILLIONS over the years.

    The KSA et al should be really passed with us.

  11. rockman on Sun, 30th Nov 2014 11:20 am 

    M – “If shale oil and tar sands were profitable at $60, why did it not happen until they reached the $90 mark?” You do understand that when the KSA “allows” oil prices to get to $90+/bbl the shale plays and oil sands will again be developed. So again a simple question: how is it worth $TRILLIONS in lost income for the oil exporters to end up back to where they were a few months ago?

    And please don’t argue that those unconventional resources won’t be developed when oil prices recovered: the development of the shale began just 9 years after $20/bbl oil. And the Canadian oil sands? In 2004 Canadian oil sands production reached 365 million bbls per year. And this was reached during a period of inflation adjusted prices of oil being $30/bbl…and less.

    Folks are certainly free to express whatever opinions they hold. But opinions don’t change the obvious and undeniable facts. According to the EIA growth in oil production from US shales began in 2003 when oil was $30/bbl. And by 2007 that production had increased 100% during a period when oil averaged $60/bbl.

    So yes: the shales really boomed when oil went over $90/bbl. But the statement that the shales didn’t become viable economic targets when the price was in the $60/bbl range (or less) is easily proven to be bullsh*t. As I said: facts trump opinions every time.

    Anyone is invited to present any DOCUMENTED FACTS that dispute anything I’ve just posted. Go ahead…make my day. LOL

  12. Northwest Resident on Sun, 30th Nov 2014 11:43 am 

    I don’t believe that the shales were ever viable economic targets. Not at $120 per barrel, not at $90 per barrel and definitely not at $30 per barrel.

    The fact that shale production started in 2003 when oil as at $30 per barrel does not mean that shale oil production was profitable at that price. It just means (to me) that TPTB recognized the fact that the world was running out of oil, that it was time to throw a Retirement Party for the oil business, and that’s about the time that massive investments accompanied by ever growing massive amounts of hype to lure individual investors began, in earnest.

    I have read emails written by oil company geologists and oil finance wizards that were never meant for public viewing, and those emails from as far back as 2005 reflect the doubt that shale production would ever be profitable, with a few referring to shale oil as an “Enron” and/or “Ponzi” situation.

    Found this on Yahoo this morning:

    GRANTHAM: ‘US Fracking Is A Very Large Red Herring’

    http://finance.yahoo.com/news/grantham-us-fracking-very-large-165607606.html

  13. JuanP on Sun, 30th Nov 2014 11:51 am 

    Rock “OK…the KSA plan is to force OPEC members to finally become a true cartel and collectively reduce their oil exports. Hmm…so far that’s a bust.”

    I have been thinking along those lines lately. I think KSA might agree to cut production if it was across the board, maybe with some exceptions for a few countries, and not necessarily proportionally. And I suspect many OPEC countries aren’t willing to implement any cuts at all, probably most.

    KSA is not going to take the hit and cut production by itself, even if Russia, Kuwait, or UAE might join in. The Saudis remember what happened to them in the eighties and know the crown couldn’t survive a similar experience today.

    The best move for KSA is to do nothing and let the markets play out, knowing that with their lower costs and large savings they are in a better position than most producers to withstand the economic pain.

    The Saudis are not the slow runners here, they are ahead of the pack.

  14. rockman on Sun, 30th Nov 2014 12:59 pm 

    Juan – Exactly IMHO. The OPEC members are watching their finite resources being sold at reduced price. Which pushes them closer to becoming net energy importers and dropping out of OPEC club as Indonesia has. The KSA has greater staying power in that regard. But they are still heavily dependent upon oil revenue to maintain political stability.

    And back to the point I’ve made about the response of the vast majority of US producers in the face of falling prices: they don’t reduce production preserving it for higher prices in the future. Even if globally enough production were to increase oil prices it would guarantee an increase in the revenue exporters are currently receiving. If we are slipping into another major global recession less production won’t necessarily increase prices if demand keeps falling. The global economy just can’t respond that quickly: after the global recession that drove prices down from $100+/bbl to less then $20/bbl by the mid 80’s oil prices stayed in the $30 – $40 per bbl price range for the next 17 years.

    Granted we’ve consumed a lot of resources during that period and have less remaining today. But look at the economies, like China and India, that were responsible for much of the increase in global demand for oil. They certainly aren’t dead in the water. But growth rates have fallen significantly.

    IMHO we won’t have a good gauge on here we’re heading for at least 6 months. Oil prices to a huge hit at the end of ’08. But that followed a ridiculously high spike during ’08. We’re seeing a slower and less severe price crash so far. It may be about to bottom out or continue to slide for months ahead. Time will tell.

  15. Davy on Sun, 30th Nov 2014 1:12 pm 

    N/R, NOo and Marm are AWOL. Ain’t that just like the corn porns to run when the fighting gets the worst. You best dispatch the doom brigade to hunt them down so they can answer for there sins of optimism.

  16. Northwest Resident on Sun, 30th Nov 2014 1:21 pm 

    Davy — Yeah, I noticed that. My guess is that they have been shocked into reality by the rapidly plunging oil price combined with the barrage of information detailing exactly how much of a sucker bet shale/unconventional always was. I’m thinking Nony is probably at some big discount food store right now, loading up with pinto beans, rice, assorted dried and canned goods, bottled water and other stuff. I’m guessing that Marmico is more likely making the rounds of all the gun stores in his location, desperately searching for .22 long rifle rounds, only to learn that the ammo hoarders beat him to it and none are to be found. I suspect that both of them will reinvent themselves with a new avatar and posting name, and start chiming in shortly with how doomed we all are!

  17. Nony on Sun, 30th Nov 2014 1:25 pm 

    Davy:

    Constant (slightly increasing) volume, with dropping price is not a demand story! Rock has a tendency to blame demand when price drops and supply (“POD”) when price rises. In reality, both are important.

    I certainly take the drop in prices as a “win” for the cornies. Rock is right to say we are not at 30, etc. However, we’re a lot better than 100+ or 147 or the nattering about 200+ back in 2008ish.

    There has not been a sudden recession. The major insight is on the supply side (OPEC inaction, market to balance itself).

    I certainly predict shale drillers to be impacted since they are the marginal barrels of production. (Duh. Duh. Duh.)

    I honestly am not “scared” to post here or feeling somehow in the wrong. I feel very strongly in the right. What, Davy, if prices had spiked would you take that as a win for the cornies??? You make no sense!

    I am trying to concentrate on work and not post much. Please let me do that. I get Internet addicted. Need to earn $$ instead. Not a trust fund baby. Peace, brah. 😉

  18. Northwest Resident on Sun, 30th Nov 2014 1:34 pm 

    Nony — Thanks for checking in. I was starting to worry about you. I’m glad you’re not curled up in a ball underneath your bed, emotionally shattered over recent events. I was just joking around with my above post. I knew that somewhere, wherever you were, that you were retaining and indeed fortifying your unbridled corny optimism and that no amount of grim reality would ever get you down. Oh, and try not to think of the inevitable consequences of those “marginal barrels of production” dropping out of the mix — wouldn’t want you to get a dent in that in finely polished bubble of optimism you live in! 🙂

  19. Nony on Sun, 30th Nov 2014 1:40 pm 

    I lubs you too, whirlybird sailer. 😉

    ‘scope down, headed deep. 😉

  20. Davy on Sun, 30th Nov 2014 2:19 pm 

    NOo, I missed ya that’s all. Thanks for checkin in. Keep that head high and don’t weaken.

  21. Apneaman on Sun, 30th Nov 2014 4:00 pm 

    Nony, the recession was sudden for all those who have lost their jobs/income since it started back in 2008. You have probably just been too busy earning $$ to notice. Unless you want to argue that honest Obama’s job numbers are accurate and the “recovery” is not just more highly refined American propaganda.

    Never has a people been consistently exposed to as much propaganda as the American public. Government, The Left, The Right, Corporate, Military, Special Interest, etc. The scale is unprecedented in human history.
    Here is a great piece that shows examples of American propaganda in action. I especially love how team Hillary, with the help of team Hollywood, is priming the Left sheep for 2016. Can you imagine the entertainment value of the screaming from the right if she gets elected. LOL just thinking about it.

    http://wrongkindofgreen.org/2014/11/28/the-white-women-of-empire/

  22. Makati1 on Mon, 1st Dec 2014 7:47 am 

    Apnea, Hilary is a war mongering capitalist and will be welcomed into the fold by both parties, who are really one and the same behind the curtain. There will be a few faux anti-Hilary rants or two to make it look good, but they are already rubbing their hands in glee and waiting for the female George W. Bush to take over from their beat up Obominator puppet. Interesting time. Maybe there won’t be an election in 2016?

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