Looking For Oil Back At $100

December 15, 2008 by Douglas A. McIntyre

Tx00338coilwellgusherodessatexasposOPEC wants to see oil prices higher, much higher. Some of its member nations are running huge national deficits now that the price of crude has gone from $147 last summer to under $50. Several experts think it could go lower due to falling global demand. Even the Chinese are using less oil.

Americans are dreaming of $40 crude and $1.50 gas. OPEC members of dreaming of the Yankees sitting in their cars in long lines which snake for miles while they wait to buy a gallon of gas for $5.

Someone has to be wrong about what is going to happen to oil prices. Every day it looks a bit more like OPEC will have its way.

Members of the cartel are taking about a two million barrel a day production cut. No one knows if that is enough to arrest the rapid drop in crude prices. But, if OPEC can take exports down once, it can take them down twice or even a third time.

The falling yield from a barrel of oil is also causing US companies to do less oil exploration and drilling. If this helps cut supply further, OPEC gets a hand in its effort to increase prices. According to The Wall Street Journal, the number of active drilling rigs could drop 50% from this last September to late 2009.

Consuming nations ought to pray that crude price do go up, at least some. There is a level, and that level might be $60 or $70, where OPEC does not need to make economic war on the US and other consuming nations and drillers have an incentive to drill.

Oil is too cheap now, and, by being too cheap, it risks causing the kinds of swings in price that the stock market is seeing by trying to escape the shadow of supply and demand.

Douglas A. McIntyre