THE BLOG

OPEC Agonistes

05/25/2011 11:50 am ET
  • Raymond J. Learsy Author, 'Ruminations on the Distortion of Oil Prices and Crony Capitalism'

The Organization of Petroleum Exporting Countries will be meeting in Vienna this week. Even with prices for crude oil near all time highs Iran and Venezuela are pressing for reduction in production quotas from current levels of 28 million barrels/day excluding Iraq (which is barely producing some one million/bbls day in addition).

On the other hand the Saudi Oil Minister al Naimi is quoted as saying "Unless the market changes significantly between now and the meeting there is probably no real reason to do anything different."

Underpinning al Naimi's air of "reasonableness" you have the OPEC songmasters such as Matthew Simmons ( "Twilight in the Dessert: The Coming Saudi Oil Shock and the World Economy") predicting oil prices approaching $190/bbl by the end of winter, and oft quoted oil analyst Philip Verleger predicting "We'll see prices well over $100 a barrel before the end of the year".

To round out the chorus we have our energy Secretary Bodman claiming regular contact with oil producers "By and large they seem to be understanding that there needs to be more oil rather than less oil in the world" he was quoted as saying last week.

Bodman's supplications must be extremely well mannered. Back in 2000 when Bill Richardson
was Secretary of Energy and had placed a call to then President of OPEC, Iranian officials waxed indignant at the thought one of the victims to a robbery having a voice in the matter and pontificated "In the 40 year history of OPEC there has never been a case of the Secretary Of Energy calling OPEC ministers in the middle of a meeting " and continued "We are very upset and disappointed at the external pressure. We don't Like it" as though the fixing of quotas to manipulate prices had become a divine right.

We have learned our lessons well since then. We have learned to say thank you to the Saudis for holding the bad guys, Iran and Venezuela in check, all the while paying through the nose (now over $67/bbl) for a product that costs them less than $1.50/bbl to produce (in many cases far less). If only GM and Ford had such margins, they could be selling their Chevy Blazers and Taurus' for $300/400 thousand each.

What Mr. Bodman should be saying to his interlocutors at OPEC is "Listen my good friends, as you are fully aware the price of oil today is at levels that are far beyond any economic justification. I have 700 million barrels of oil in my Strategic Petroleum Reserve, and industry is holding a further 310 millions in reserve in commercial stocks that are now 10 percent higher than a year ago.

We are also members of the International Energy Agency who hold an additional 700 million in their Strategic Oil Reserves and together we hold a total of 4.1 Billion in reserves both strategic and commercial. If you cut production we will begin to place these reserves into the market to stabilize availability and price, and you my good friends at OPEC will be losing your equivalent market share (by the way are you listening Iran?).

What we would really like you to do is increase the availability of oil so that the price returns to levels that make economic sense and reflect free market conditions. And please, don't tell me you are doing all you can by pumping 29 million barrels a day (including Iraq). For those of you, my good friends, who keep a diary, turn to 1979 where you will see you were producing 31 million barrels a day. Here we are more than a quarter of a century later and you tell me you can't do better. C'mon guys, give me a break.
I've got a job to keep here and you can't make me look that dumb".

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