OPEC Prepares To Wage War

As ironic as it may seem, the finances of OPEC members may be as bad as at any time in recent memory. They have become poor as quickly as they became rich earlier this year.

OPEC obviously expected oil prices to stay above $100 for some length of time. Government budgets in places like Iran and Venezuela depend on high crude. Now they face massive deficits and no way to handle their obligations.

In places including Saudi Arabia and Kuwait parts of the banking systems are strained and the ability of royal families to buy new Hummers and private jets has been hurt.

OPEC has seen an astonishing drop in crude prices catch it unawares. Who would have believed that oil would fall from $147 to $55 in a matter of months. But, economies in the West, India, and China have slowed despite massive stimulus packages in place and planned.

The cartel faces an easy choice. There was a time around summer when driving up crude prices could be blamed for hurting the global economy by increasing the price of gas and fueling inflation. Those issues are hardly relevant at this point.

Now, OPEC has no option but to severely cut supply and little risk of being viewed badly, at least in the early stages of production cut.

To move oil back up would involve a Herculean effort to keep shipments down. Daily exports of crude would probably have to be chopped by two million barrels a day. If that does not work, the number would need to be ratcheted up again.

Cheap oil is not here to stay. OPEC nation’s can’t afford it and being accused of causing dangerous inflation is no longer a problem.

Douglas A. McIntyre