THE BLOG
09/10/2007 09:21 am ET | Updated May 25, 2011

Oil Price Follies: This Week Starring OPEC!

Like the "Perils of Pauline" serials of times past, the OPEC serial meetings come at us with heightened drama and bombast. With OPEC it isn't Pauline tied to the rails with a steam engine barreling down the track, but rather us and the world economy being held over a barrel. Whereas with Pauline we can count on her being rescued in the nick of time, with OPEC every meeting portends further slippage into the quagmire of oil patch hegemony.

Last Friday's job data showing the first drop in four years underlines a growing consensus that the recovery is veering toward recession. It is therefore especially troublesome that not a single official voice has been raised pointing to the price of energy as a key component for the
deteriorating economic situation.

Certainly the sub prime debacle is playing a key anchor in the economic events of the moment, but certainly this nation as the world's largest oil consumer experiencing a 50% increase, since the beginning of the year, in the price of a commodity crucial to its economy is a staggering economic blow. It represents an additional outlay of more than $500 million a day or the equivalent of a transfer tax of over $150 billion a year to oil interests, based on the difference in price from January to September alone, with its debilitating impact on discretionary spending and business expenditures and investment.

But where is the concern, even outrage from Treasury Secretary Paulson, Secretary Bodman and most especially the great advocate of the "Free Market," President Bush, who has seen oil prices climb some 300 percent during his Presidency with nary a chastisement to either the oil industry or their friendly comrades in arms, the members of OPEC and most especially its putative leaders, Saudi Arabia..

If ever a Freudian slip made its point, it was President Bush at the APEC meeting in Australia last week when he expressed appreciation for having been invited to the "OPEC" summit and commended the "Austrian soldiers" (the OPEC meeting takes place tomorrow in Vienna, Austria).

While the price of oil is nearing all time highs and OPEC gathering this week in Vienna, we are being treated with the same blather that precedes virtually all of these witch's covens -- oily palaver meant to lull us into believing that OPEC is doing all it can to supply the world's oil needs in responsible fashion.

In sharp contrast to OPEC's public face and the Administration's apparent acquiescence to OPEC's continued extortion, the International Energy Agency exhorted OPEC publicly and clearly stated that the world needs more oil. That OPEC should increase production to ease price pressures. That oil in the region of $70 a barrel was too high and a decided threat to the world economy.

OPEC meanwhile was issuing its oily explanations. Only yesterday Mohammed al Hamli, Arab Emirates Oil Minister and OPEC's president advised that "Current supplies to the petroleum market are sufficient," following up to the comments he made last Thursday, "I think the market is very well balanced. There is no shortage of supplies". He went on, "If you think prices are high in nominal terms, they are almost close to what they were in the 1970's," as if to justify today's vertiginous prices

There was no question however if the same parameters of "nominal" were applied to the price of gold. Extrapolating gold's price at the time of Mr. al Hamli's computation for crude oil, the price of gold today would be closer to $1,800 an ounce rather than it's current price of $700/oz.

So much for Mr. al Hamli's nonsense and the self-serving rationalizations tendered to a gullible public.

In keeping with Mr. al Hamli's comments, within the past fortnight Abdalla el Badri, Secretary General of OPEC, opined that the group was unlikely to raise production levels when its ministers meet. "You cannot convince any member to add more crude oil to the market because we have enough crude" he told Bloomberg. Really?! Since the beginning of the year OPEC has held back 1.7 million barrels of crude a day from the market. The group's production was some 30 million bpd, 30.37million bpd in August, all near the lowest levels in the past four years. To underline the patent nonsense in OPEC's claims that its goal is to "achieve supply and demand equilibrium" its production in 1979 I repeat 1979, was 31 million barrels/day. And this at a time when its stated and acknowledged reserves were far less than those acknowledged today.

An oft repeated refrain has been that "we have to consider the weakness of the dollar" as a rationalization for ever increasing prices. One need remember that since January the dollar has decreased in value by less than 10 percent, and that against only certain currencies. On the other hand the price of crude has increased 53 percent.

OPEC's willing friends within the oil patch are always happy to chime in and lend their expertise to help assuage our anxieties at the outset of these meetings. This time around there is Christophe de Margerie, CEO of the French oil giant Total telling us and the Financial Times last week that he "expected prices to definitely to stay high and we will have to build our strategy on this," while instructing us that biofuels would not provide an answer to the world's energy needs. One would imagine that this "unfettered" third party opinion would provide some cover for whatever excess comes out of the meeting. Could it be that M. de Margerie's current negotiations on a $10 billion gas project with Iran makes him so amenable to OPEC's point of view?

And then there is OPEC's on-going theme that oil inventories are adequate and therefore nothing much needs change. This of course is a blatant red herring. OPEC does not meet to determine stock levels as its first order of business, but rather to determine the level of tolerance that will be accepted by its customer base (are you listening Mr. Bush?) in order to maximize price.

Since January they have been successful in raising that price by over $25 a barrel -- the price per barrel of oil at the beginning of the "W" presidency. Given this administration's incestuous ties to the oil industry, this dramatic increase has been tolerated with little or no push-back. OPEC will therefore will feel at liberty to push prices higher yet. Oh, and excuse me for bringing this up, where by the way are our Congressional leaders and Presidential candidates on this issue?