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China reported that its exports rose 18% in December over the same period last year. It also said that factory production was up 25% for the same time frame. The news has caused several economists to revise their GDP target for the world’s most populus nation to 11% for 2010.

The rise in production at Chinese factories will increase the need for petroleum-based chemicals. It will also cause transportation companies in the People’s Republic to add to their fleets and schedules to get manufactured products from factories in the center of the country to ports. Read More »

One problem the Organization of Petroleum Exporting Countries (OPEC) has had since its founding is ensuring that members abide by their quota agreements. To some degree, keeping member states in line resembles nothing so much as herding cats.

At its December 2009 meeting, according to Reuters, OPEC ministers issued a confidential document suggesting that if members continue to produce at November 2009 levels, crude stocks will increase by 800,000 barrels/day in the first quarter of 2010, and by double that in the second quarter.

The cartel’s nominal production ceiling is just less than 25 million barrels/day. In November, the 11 members subject to quotas (not including Iraq) produced 26.63 million barrels/day, nearly 1.8 million more than the ceiling. OPEC wants to maintain its price by lowering crude stockpiles in developed countries. Current stocks stand at about 2.74 billion barrels, and could grow to 2.85 billion barrels if OPEC members continue to produce at November’s pace.

The cartel’s problem is that member nations have to answer for immediate public needs as well as keeping an eye on longer-term considerations. Middle Eastern members have a demographic problem: their populations are young and unemployment is high among that group. This combination can, and often does, lead to civic unrest or outright regime change.

Venezuela and Nigeria rarely comply with quota agreements because both need to produce as much crude as they can to keep their national economies afloat. Cutting production is equal to cutting their own throats.

Another significant problem for OPEC is Russia, which has refused to join the cartel since its creation in the 1970s. Russia is the second-largest producer of crude in the world, and it always behaves the same way when OPEC installs quotas — it pumps more crude.

As crude becomes scarcer though, it is reasonable to expect OPEC members may change their behavior because the calculus leads to the conclusion that prices can only go higher in the long run. Unfortunately for OPEC, short-term needs still outweigh long-term thinking among some members. That won’t change soon.

Paul Ausick

Oil prices are back above $80. This time the rise is blamed on cold weather in the Northern Hemisphere. Weather forecasters predict that the winter of 2010 may be especially cold. Global warming in reverse.

Oil prices may not drop back toward $70 as the spring thaw begins in March and April. The quick improvement in GDP growth in India and China may prevent that. Read More »

It is simple to dismiss the current rise in oil to just shy of $80 as a reaction to the value of the US dollar or a possible cold winter in the northern half of America. A more macroeconomic view might point to the theory that the world reached its “peak oil” production this year and that demand will out strip supply from now until the end of time.

It is also possible that the economic recovery is strong enough that the demand for crude is rising rapidly while OPEC and other producers intelligently keep output flat. They do not need to appear greedy. The cartel could cut supplies, but that would cause a reaction to OPEC’s actions as the potential cause of another recession. OPEC can wait and let demand drive higher prices while it remains neutral. Read More »

The link between the global economy and oil prices may have “de-coupled” in July 2008 as oil prices rose to $140 and the recession took hold across most economies around the world. Some of the increase in oil prices then was tied to speculation, and some to a fear that global supplies were dwindling faster than expected.

The price of oil and the economic slowdown began to form a strong link earlier this year as crude prices dropped below $40 as the worst of the recession developed in the first and second quarters. Read More »