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OPEC Tosses Us a Few Crumbs While Oil Marches to $80. Why?

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The oil price follies continued on Wednesday when NYMEX crude futures closed at an all-time high of $79.91 a barrel -- and that after making a record-breaking intra-day top of more than $80. So much for the Saudi-led crumb-tossing by the Organization of Petroleum Exporting Countries (OPEC) -- a day earlier. (A political aside -- CNN's Anderson Cooper segment this morning reported on the clear intimations that the Saudis would welcome a U.S. attack on Iran. Could it be that one issue (Iran) has anything to do with the other -Saudi magnanimity at the OPEC table keeping the price within a humble $80/bbl range?) Surely not, but shame on us for thinking in such duplicitous ways.)

As you may know if you happened to read Wednesday's New York Times report -- apparently supplied by the PR department of OPEC -- the ever-so-gracious Saudis convinced their crude-pumping buddies to give us oil-addled pigeons a tiny break. "Pump a little more, boys," I imagine Saudi oil minister Ali al-Naimi cajoling, "just so we don't accidentally choke the life out of the oil-consuming goose." Maybe he cautioned them that the U.S. economy is looking a little sickly (see my post of 9/10/07, "Oil Price Follies: This Week Starring OPEC!"). Or maybe he brought up the sub-prime mortgage mess and the threat it portends for the world economy, not to mention the threat to Saudi Prince Alwaleed Bin Talal Alsaud's pocketbook. (The prince happens to be an important investor in Citigroup, which has, along with others, been impacted by the credit-induced stock market declines, declines being further exacerbated by the impact of record oil prices). Does a voracious OPEC want to be blamed for pushing a now struggling economy over the edge?

Well, of course not. That's why the oil boys consented to raising their production quota by 500,000 barrels per day. "Our message to consumers is that we care and we are concerned...," oozed Libya's Abdalla Salem el-Badri, the secretary general of OPEC. Thanks for the sentiment, pal, but a barrel of oil will still cost us the better part of four Jacksons. And there's no guarantee the producers will even live up to their promise. With prices at these levels, OPEC is stalling the 500,000 barrel increase until November 1, the supposedly effective date of the increase. Their cuts in production of 1.7 million barrels instituted at the beginning of the year remain in place till then.

Perhaps the more interesting question, though, is why oil went on to reach new highs after OPEC tossed us this crumb. Might the lack of transparency in commodity futures trading have something to do with it? How easy it would be for OPEC members to promise a supposedly price-easing quota boost just to fill a newspaper headline, while surreptitiously manipulating the price higher by buying up oil futures contracts in markets that are both opaque and commodity exchanges that are largely unregulated from London to Singapore.

But then again, why bother manipulating futures prices higher when the scaremongers and peak-oil pranksters will do it for you? Both the Times and The Wall Street Journal reports hastened to mention and focus on the big drop in U.S. August crude oil inventories. U.S. supplies, however, were still ahead of a year ago, and at levels that comfortably corresponded to five year averages. By the way, if inventories didn't drop at the peak of the Labor Day driving season, when are they meant to drop. But no one seemed to care about that, in that it doesn't fit with the scary theme of the day.

The Journal, picked up on a classic OPEC mantra (OPEC President Mohhamed al-Hamli speaking about oil prices Sunday, "markets have enough oil but lack of capacity to refine it was contributing to high prices") and cited continuing gasoline-supply shortfalls related to refinery outages earlier in the year. This is one of the great canards of the oil patch's blather: "Refineries are down, capacity is constrained, therefore the price of crude goes up." Really?! In the world as constituted for the rest of us, or as learned in Economics 101, if you use less of a product the price tends to go down. Refineries are shuttered or on turn-around, they don't use more crude oil, they use less. Therefore where is the logic, the rationale that refinery bottlenecks cause higher crude oil prices. Certainly if refineries produce less gasoline or fuel oil the price of gasoline or fuel oil may well go up. But not that of the basic feedstock, which is crude oil, and that is what OPEC produces.

And, for good measure, the Journal reporters also threw in the standard party line about most OPEC members producing flat-out, with the Saudis alone supposedly having untapped spare capacity. They failed to note that no one really knows what most of the OPEC members are capable of producing. These are figures held close to the chest though the installed production capability is certainly considerably greater than what is being supplied to market at present with enormous and as yet unexploited potential reserves waiting to be tapped. Just to repeat a point previously discussed, OPEC is currently producing less than the 31 million barrels/day that were being produced in 1979. Yes, 1979!

The news reports cast OPEC's magnanimity in terms of a balancing act -- how to mitigate damage to a potentially slowing world economy while also making sure that the price doesn't drop too far, too fast. In other words, how to keep the goose just healthy enough to push out those golden eggs. It's a tough job, but with all the outside help from a dozing press, a silent U.S. government, and the Chicken Littles clucking words of doom, OPEC should have no trouble keeping oil prices far above rational free-market levels.