OPEC Ready To Trump Deflation

December 17, 2008 by Douglas A. McIntyre

Tx00338coilwellgusherodessatexasposOPEC is serious now. The nut-ball dictators who run Iran and Venezuela need more money to balance their budgets and keep the flow of capital to terrorists going. In Saudi Arabia, the government has halted the construction of The King Abdullah Economic City, which would have cost $30 billion. Abdullah may not have long to live. Oil money was to build that project.

The cartel says it will cut production by two million barrels a day, or about 5% of the world’s capacity. Russia will probably go along with that so Putin does not lose his job.

OPEC is faced with a sharp drop in oil demand. Its September price increase was greeted with the cost of crude falling even faster than before. But, the member states are in a tough spot. If the December cut does not do the trick, there will be more in January and on and on until supply is well below demand. Until oil is back above $70.

One of the biggest concerns the Fed has is that the US is at risk of entering a period of deflation. Consumer price were down two months in a row. For people counting, the has not happened since 1947. The November drop was in large part due to a 17% plunge in fuel prices.

According to The New York Times, "there is good reason to fear deflation. Once prices start to fall, many consumers may decide to reduce their spending even more than they already have. Why buy a minivan today, after all, if it’s going to be cheaper in a few months?"

The worst problem with deflation is the government policy usually cannot stop it. The Japanese found that out the hard way two decades ago. It cost them ten years of economic growth.

Six months ago, the administration and consumers were praying for lower oil prices. Bush went to the king in Saudi Arabia and begged for more supply. Now the king will not get his new city. He will keep cutting production and inflation may well return to the US pinching the consumer hard during a deep recession.

What a relief.

Douglas A. McIntyre