Thursday, October 23, 2008

OPEC Has a Big Problem

The dropping demand and price for oil has created a major problem for OPEC (and other oil producers) with no real easy way out.
Members of the Organization of the Petroleum Exporting Countries saw fit to schedule an "extraordinary" meeting this Friday after seeing oil prices drop more than 50% in three months.

That constitutes an emergency to them, just like the weakening global economy is to the rest of us.

"It's about a snowball running downhill, and turning into an avalanche," said Anthony Sabino, a professor of law at St. John's University, whose legal practice includes oil and gas law. "Per-barrel price is cascading downward and only gaining momentum.
The problem for the oil producers is that their economies are generally based on the assumption of $100 or thereabouts for a barrel of oil. If they cut back on production to cut supply and force up price, they further weaken the economies of their major customers. They also create the incentive for further domestic oil exploration and development of alternative fuels. If that happens, it could be show over for OPEC and friends.
And cut they will -- at least that's what everyone predicts. No one expects the cartel to not act at a meeting members rushed to organize. But "how do they stretch the longevity of high prices, by keeping prices low enough [so] as not [to] push the world towards quickly developing alternatives and [keep] prices high enough to not damage production?" said Thomas Hartmann, an analyst at Altavest Worldwide Trading.
You could be seeing the beginning of the end for OPEC as we know it. Also, bear in mind that Venezuela has major financial commitments that require a high income from oil to meet. The dropping demand for oil world wide is putting all these producers in the trick bag, all of them chasing a shrinking market share and dropping revenues.

I predict that OPEC will announce a drop in production but will have a hard time making that stick. Chavez will make some more stupid comments about the U.S. but will try to sell every barrel of oil he possibly can.

The dropping price for oil and gasoline at the pump will go a long way to get the US out of the recessionary drift.

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