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by Jerome a Paris
Just 5 years ago, after a terrifying stint when oil went above 30$/bl and briefly threatened to touch 40$/b, OPEC got terrified by such high prices and pledged to keep prices in a band, between 22 and 28$/bl, a level which was then seen as significant higher than it should be.
OPEC was terrified, because the last time prices went up a lot, in the early 80s, they got used way too quickly to all the easy money, which they blew in prestige projects, waste, and entitlements to their populations that would come to bite their asses when prices went down and they had to go in debt to keep people happy and peaceful.
Oil prices went down because the West learnt to use less oil (mostly in the industry and power generation sectors, but also a little bit in the transport and household sectors). They also went down because nobody respected the discipline of the quota, and everybody overproduced, thus increasing supply and contributing to lower prices. Finally, they went down because Saudi Arabia decided to show its muscle and make everybody sweat. As the largest producer, it had taken upon itself to ensure the discipline of the cartel almost all on its own, and its production went down from 9mb/d in the late 70s to less than 5mb/d in the early 80s. But with others simply filling up the gap, it lost revenue as prices were no higher due to that "freeriding" by others. So they opened up the taps in 85, brutally increasing production and flooding the market with their cheap oil. Oil prices dropped from 25$/b to 12$/b, and everybody got the message. Saudi Arabia, as the swing producer with the ability to flood the market, could get prices up AND down. After that, a pretty long period of price stability ensued, basically since 1985 till 2000, with Saudi Arabia as the mostly Western-friendly "oil central bank" keen on price stability. But spare capacity, plentiful then, started slowly going down as demand slowly crept up, and started becoming an issue in recent years. The first price increase in 2000 was mostly an accident, an overreaction by OPEC to their mistake the previous year: in 1998, they made a wrong call on Asian demand, and put too much crude on the market, causing prices to dip below 10$/bl. Shaken by that painful experience, they tightenend up their discipline, with the help of Mexico and Norway, and lowered production as growth kicked in again - thus the price spike in 2000, and their decision to establish a new trading range. That range worked for 2 years, but was not to last, as China's emergence on the market, after years of basically being self-sufficient, created a massive - and seemingly unexpeted by most - new source of demand. Thus the price increases in the past 3 years, which come from an excess of demand, and not from an artificial lack of supply as in previous cases. Quite simply, Saudi Arabia has become unable to get prices down, and OPEC is simply noting that fact.
That's what they keep saying - that they could. But it seems that they simply cannot. And they know that nobody else can step in with additional production, so nobody can bring prices down on the supply side. With demand hardly dented with prices at current levels, and growth apparently still going strong in many places around the world, inclusing the two largest importers, China and the USA, they will apparently confident that nobody will come to spoil their party this time.
And the post-Katrina price increases have already been forgotten, haven't they? But the other effects of Katrina have not gone:
Which means that I will probably lose my end-of-the-year bet on prices, but not by that many months.
Earlier "Countdown" diaries: |
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Countdown to 100$ oil (18) - OPEC happy with oil above 50$ | 6 comments (6 topical, 0 editorial, 0 hidden)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$ | 6 comments (6 topical, 0 editorial, 0 hidden)
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