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Page added on November 29, 2014

Is OPEC A Toothless Tiger?

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?"

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.

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.

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.

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.

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

Spot on, Rockman

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?