OPEC Ready To Take Crude Prices To The Mat

After months of false starts, OPEC claims it is ready to drop production far enough to pull more money out of the pockets of the oil-consuming nations.

The cartel has been humiliated more than once as it has chopped output only to see the price of oil drop further. Since September, OPEC said it has taken four million barrels a day out of circulation. That number is in dispute. It may be smaller. But, the fact of the matter is that some of the organization’s members probably did not follow the rules and cut as fast or deep as had been planned. Nations including Iran and Venezuela may need the capital too much to drop the number of barrels that they export.

Once oil prices started to cascade from over $141 a barrel this last summer to well below $40, OPEC knew that its members would not be able to support their own economies which, in many cases rely almost entirely on income from crude sales. Russia, which is not a member of the cartel, is facing similar trouble, so the incentive to move oil back toward $70 gets greater as each day passes.

According to MarketWatch, "OPEC is ready to make further cuts in oil production in coming months if prices and global demand don’t stabilize, the oil cartel’s secretary general said at the World Economic Forum."

The world should get ready for much higher oil prices, even if that will make the recession deeper. OPEC has the capacity to cut demand at a rate to outrun falling supply. It has not done so, but that could change before the end of this quarter. Its member nations are ready to put their own interests ahead of those of both their customers and the economy at large.

The countries in the cartel have relied on oil to build their own infrastructures and sovereign funds. The money has allowed them to invest in businesses throughout the US, EU, and Japan. Now, when assets in those nations are relatively cheap, OPEC members have lost the capital that they need to take advantage of bargains.

The price of oil is moving back up. The only question is how far.

Douglas A. McIntyre