The price of oil is falling, right?

ROCKMAN

In addition to Twilight's explanation there's another factor shown by the graph but not obvious at first. After the demand destruction in the 80's there was a huge gap between demand and production capacity. A price war ensued within OPEC. To capture lost market share the Saudi's eventually dropped oil to $10 per bbl. Today, virtually all oil exporters admit they are at or near PO. Except the KSA. Even if we start seeing significant demand destruction it won’t put the pressure on prices as it did back in the 80’s. Mexico’s production is declining quickly. You can’t really predict the future but it’s difficult to imagine them selling what little oil they have left at bargain basement prices just to keep the KSA from selling all they want.

Also, it’s good to remember that OPEC made almost as much income the first 6 months of 2008 as they did in all of 2007. In theory, they could cut their production in half tomorrow and make as much as they did last year. And given how much oil would jump if they did that they would likely make a lot more income.

IMO, the price run up this year was not a lack of oil supply but a lack of competition between oil producers. Folks have been calling on the KSA to produce more oil. They can’t: there is no one there to buy it. The world currently has all the oil it wants/can afford. All the KSA can do to sell more is to lower their prices and take someone else’s customer away. And with current revenues far greater than they had expected a year ago why would they want to do that? This is the same reason the gov't pays farmers to not produce to much of certain crops: too much supply means too low a profit for the farmers. If it's Ok for the US gov't to keep excessive amount of a food crop of the maket why would it be wrong for the KSA to do the same?