OPEC's "Noble Cause"

Remarkably, breathtakingly, while holding us all for idiots at a level of presumption comparable to that of his "brother in arms" Bernie Madoff in his shared talent of ripping people off, OPEC's senior nabob, Saudi Oil Minister Ali al Naimi, enlightened us according to a report on CNBC.com that, "You must understand that the purpose of the $75 price (Saudi King Abdullah's target) is for a much more noble cause. You need every producer to produce, and marginal producers cannot produce at $40 a barrel." Yes, I kid you not. And it was reported with a straight face with no commentary nor query by the ever aquiescent press that covers matters relating to oil and its attendees.

Not to be outdone, and in perfect two step the New York Times carried
its oil ballet choreographer Jad Mouawad's byline anticipating today's OPEC meeting by penning a poignant paean to higher oil prices that found its way to the front pages yesterday of the ever-pliant New York Times, "Big Oil Projects Put in Jeopardy by Fall in Prices" and in screaming headlines by its sister newspaper, the International Herald Tribune, "Low Prices Cripple Oil-Exploration Push."

There followed a fulsome litany of projects halted and/or suspended and the wreckage being foisted on the suffering oil patch, a perfect set up for OPEC to announce a major cutback today that in Mouwad's insinuation, should be greeted and cheered by us all, and setting the stage for Al-Naimi's exercise in nobility.

In these dour times its nice to find a happy ending. At the conclusion of today's meeting, OPEC announced an additional production cut of more than 2 million barrels/day. And then surprise, surprise certainly dampening the Saudi Oil Minister's brush with nobility, the price of oil fell by some three dollars a barrel, a not inconsequential drop, breaking $40/bbl at one point. Sic Transit gloria!

Comments

[vippy]

They hid their inventories on tankers on the oceans and we were told our inventory depleted - remember?
OPEC just to get even would have to cut 7.7 million barrels a day and that is unlikely, so oil prices
will be falling. Serves them right. And you know what is even more disturbing is the fact that
our dear congress/senate knew what was going on, they were briefed on it, and decided to do nothing!
I ask again, what has congress ever done for the people?

[DuganS1]

Oil prices didn't go up because people were hoarding. They went up because the global capacity to produce oil was barely over worldwide demand. At the rate of growth for global oil demand in 2007 and the first half of 2008, many believed global demand would outstrip global capacity at some point, thus prices skyrocketed. What exactly are congressmen going to do about this besides take measures to reduce demand and increase supply via more drilling?

[EinChicago]

Bingo. The mantra of the water carriers (cough KillTheMessenger cough-0 and teh manipulators was "Capacity Capacirty Capacity." Now OPEC has cut its own wrists with 2 big cuts which telegraph to the world "Hey, we now have at least 6 million barrels per day extra capacity if demand increases"

[Rule Of Law]

Everything you say is true! Additionally as someone pointed out, below, this is an admission on their part that they currently produce something on the order of 6 million barrels per day excess.

Peak issues aside, this should put the final nail in the coffin of those who think that OPEC and OPEC alone sets the market price for oil. The runup this year (just like the current manufactured economic "crisis" and 700 billion give away) was the product of market manipulation and speculation. People should know by now that the major oil companies like Exxon don't just sit on the sidelines praying the price goes up to $145! They take positions in their own product through brokers, hedge funds, and unregulated commodities traders to move it when they need to or can, as under the blind Bush administration. This year's pricing was a money grab just like the banking "bailout."

[Maschine]

This goes to show that the reason oil went passed 75 vucks was pure speculation and had nothiojmg to do with the idiotic Notion that China and india were somehow responsible for it.

Consider, China produces half its oil and buys the rest from Iran, the total equals, wait for it,,,,a piddly 9 billion barrels.

This was all about Greed and no regulations. OIL should have a set price where everyone benefits. Traders can only buy it if they take delivery, ya, you think some of the paper barrels and speculators would run for the hills.

[Shrinath]

Oh you got right. It was Oil Futures that were getting scorched and it reached that $147. Consider this, There is still reserves oil Light Sweet Crude for the next 150 years. So it was nothing but manipulation of the markets by which Bush and cronies became rich beyond imagination. Oil, should trade at $23. Not a cent more.

[KillTheMessenger]

"There is still reserves oil Light Sweet Crude for the next 150 years."

There will always be reserves of light sweet crude. If you suck an oil reservoir dry with conventional methods, you get approx. 50-60% of the oil out (in exceptional cases a little more). After that you can drive a mine shaft down into the rock and dig up the rest like tar sands... no big deal. Or you can wash it out with solvents or steam. But we will never do either because these methods have an EROEI of less than 1.

Now... the harder question is... is there light sweet crude for 150 years at the current rate of production? The answer to that is "NO". There is not.

If you claim otherwise you are welcome to cite your sources for that claim.

:-)

[DuganS1]

Really?

"BEIJING, April 29, 2008 (Xinhua) -- Soaring oil prices have not slowed China's consumption of oil as statistics show that China's apparent consumption of crude oil and refined oil products both hit record highs in the first quarter of the year.

According to statistics released Tuesday by the China Petroleum and Chemical Industry Association (CPCIA), China's apparent consumption of oil products composed of gasoline, diesel and kerosene rose by 16.5 percent year on year to 52.73 million tonnes in the first three months, and crude oil, rose by eight percent to91.8 million tonnes. The growth of oil products consumption was a record high and much higher than the same period of last year, which was only 3.6 percent."

[drkazmd65]

The Princes and Nobility of Saudi Arabia are trying to play out an 'interesting' game with their own country,... the Clerics, and the 'peons', and the common people in those countries have mostly been kept marginalized BECAUSE there has been a lot of money to throw around.

As the easy money supply starts to dry up,... their own people start to pay attention to the little (and not so little) inequities in their own country agains them. The Clerics get a bit more loud & rebellious. And unrest at home picks up.

Without the money, the ruling family loses a lot of its implicit control.

It's not so much the lack of money & revenue that worries the Princes,... it's the lack of leverage and control.

[Rule Of Law]

Dr. I first read that as "iniquities" in their own country, and said, hmmm? For sure!

[Hoelder]

It shows that the people in charge of OPEC are incompetent. Mostly they are seated because of nepotism. Their organization does not bother with complex calculation of oil inventory and decline in about everything you need oil for.

[GetAbike]

Sometimes I just don't get your hyperbole Raymond.
So you really think that OPEC saying that cheap oil is counter-productive is comparable to the Madoff ripoff? At least we consumer nations get something extremely valuable for relatively nothing, whereas Madoffs victims invested much and lost everything.
Gee Raymond what DO you think is a fair price for oil? Maybe $6/bbl is a fair price?(based on your previous Wild Ass Guess of $5/ bbl production cost for KSA).
Tell us how much it is to mine tar sands per barrel.
How much to drill 20,000 feet under water? Or a thousand miles inland in Bumtuk Oilistan?
You seem to have great disdain for articles stating,"Low Prices Cripple Oil-Exploration Push." They must be lying, right?
Seriously, believe them. They WILL NOT be doing projects of this sort without price supports. Those projects, like many commercial projects around the world, that have not been canceled outright, may find it hard to get financing anyway, especially if they are south of the border or in the 3rd world.
Ahhh, nuff said.
Let's enjoy our happy motoring while we can!

[TexasDem0]

Are OPEC members mining tar sand, or drilling under 20,000 feet of water?
Do you work for Exxon?

[conuschiro]

As always Raymond, spot on. I haven't been able to understand why no "news analysts" have been calling OPEC out on this collusion. OPEC has regularly schemed to push up prices in a complex manner that may have been hard for many people to understand, but here the Saudi Oil Minister is giving headline and story, all the media have to do is put it on the front page.

Imagine the outcry if Air Traffic Controllers said "we will only move 10 aircraft an hour, we don't get enough money to make it worthwhile getting out of bed in the morning." Oh yeah, that would be a strike and Reagan sacked them all. What is the difference?

I'd be interested Raymond if you could tell us what the fall in oil translates to in terms of a boost to the economy. It helps airlines, trucking companies, auto manufacturers, shipping, commercial fishers, and every household in every country in the world. Surely it is as big as some of the bailouts being grabbed and would put more in the pockets of mortgage holders than any govt sponsored scheme.

PS I've had a bit of a chuckle about the pirated tanker Sirius star. It is worth exactly zero in terms of a ransom, keeping 2 million barrels of crude off the market. Saudi is saving about $1.8m a month of contango.

[cam]

I fail to see the issue. Ali al Naimi's statement seems clear enough. If I were in the Saudi's position I would probably adopt much the same attitude - it makes ethical, economic and strategic sense.

There is a margin outside of which the oil price is bad for the world and the environment. If we were responsible we would tax oil to keep it in that margin.

Last tax raise on gas in the US: 1993
Europeans pay about $7.50/gal.

[carrytrade]

I agree that the current low price of oil does not bode well for the development of new non-oil energy technologies nor for the environment. This is an unfortunate outcome.

http://deltahedged.com/

[BBackSoon]

I know that in Europe that Gasoline costs over $7 a gallon but they also have an extensive network of trains and other public transportation and small cars are the norm not the exception. I drive a small car and it is not fun to be next to 18 wheelers. In Europe they have trucks not tractor trailers.

[cam]

I get your point, but the differences are in Europe's favor. America needs to re-invest in its freight infrastructure and expand its light rail commuter network. We are disadvantaged because our urban sprawl has very little public transit infrastructure to support it. We should have been nucleating our cities about a network of transit systems, which would have made efficient travel between population centers feasible while also supporting expansion. The question is, how do we fix the mess and how do we finance the fix?

[balance]

The past few years have shown that speculation in vital commodies such as energy and food, when taken to extremes and/or when manipulated, has the huge potential to damage the economic lives of billions of people around the planet.

Some commodity speculation and trading serves the useful purpose of being a "middle man" of sorts, helping the exchange of commodities between producers and consumers.

However, Wall Street has undeniably proven that market psychology, herd mentality, and highly leveraged trades can abuse these markets. Mild shortages of commodities could spark herd-like stampedes on the market, over-riding fundamentals of supply and demand, and cause severe price-gouging effects among the poor & middle class.

It has also contributed to the economic meltdown in the US. Raising the energy (eg: fuel & heating) & food costs of middle class Americans, by thousands of dollars each, put a huge dent on our economy.

The reason why the injustice of commodity scam doesn't have the attention it deserves, is because, proportionally, it hurt the disposable incomes of the poor & middle class much more than of the elites.

[1will]

I guess Chavez and Ahmadinijad are having a hard time paying for all of those shiny new weapons on order from Russia.

[KillTheMessenger]

The man (Ali al Naimi) is fundamentally right. He is a fool for saying it the way he did, but in the end he is right. The marginal cost of new oil, especially from unconventional sources, is higher than the current market price.

So what are we going to do about it? We will either pay higher prices or use less oil. Preferably the last.

[thedesertdweller]

You, along with all these other thoughtful souls, must be kidding! This OPEC boss also stated publicly that Saudi oil costs less than $2 a barrel to produce! Even our costs, drilling in the gulf, in harsh conditions, are well under $40 a barrel to produce. I recall several months ago putting this info out there and being attacked by the public at my $2 per barrel claim but now they even admit it! And honestly, what is a marginal producer? A guy with 2 acres??? Any serious oil producer of merit gets the stuff out of the ground for well under $40, look back to previous times when the price was $10 a barrel!!! in 2008 our technological advaces have at least doubled the efficiency of oil producers since then so a true price, including a lot of profit, should be no more than $25 per barrel.
Regarding the other problem we will have with cheap oil¦ gas guzzlers and the environment. Beware of the crazy liberals who will add a $4 tax, which is not the answer. We the public should not have to suffer because of the broken ideology of pure markets or the impotent federal government.

What we need is cheap gas for us now but a federal government that can still, even with $1 per gallon gas, have the balls to mandate strict CAFÉ standards, mandate 100MPG fleet averages within 10 years.

[KillTheMessenger]

You fail to realize that a lot of oil does not come from the Gulf (even the oil that does come from there costs a lot more to produce than $2 these days). As a reminder "marginal cost" means the production cost of the most expensive source, not the cheapest or the average. It means that we can not drill for now oil off shore. It means that Mexico can do nothing about the decline of its oil. It means that the Europeans are losing money on every barrel they are producing. It means that unconventional resources can not be tapped into.

"What we need is cheap gas for us now "

Why? Just because you can't stand the sight of expensive gas?

"100MPG fleet averages within 10 years."

100mpg fleet average is simply impossible because nobody can make a 100mpg car right now. And it will take 20 years to turn the whole fleet over.

Funny thoughts, though.

[DuganS1]

No one has costs of only $2 a barrel now days. The cost of energy service companies, drilling companies, and equipment costs far exceed that amount for everybody. A lot of companies have large deep water drilling operations and the day rates alone equate to costs of well over $40 a barrel. Look at the Transocean annual report or recent conference call transcripts.

[thedesertdweller]

This idea that we cannot use our sense of priorities and ethics to force the market to create what is right is not valid. We should not have to suffer economically to do the right thing. That is why we need a government that is pro active and ethical. We don"t need $5 per gallon gas to be forced to do the right thing. This is a flaw in liberal and conservative thinking.

Last but not least now is the time for government to invest in alternative energy with both barrels loaded! If we did that OPEC would be slaughtered in 10 years, never having the power to hold us hostage again. With oil this cheap private industry will not make the investment. But a government with a broad strategic long term view can and should sink hundreds of billions into new green energy sources and then license it back to private industry.

I am appalled at Liberals who want to use the market to punish us (raising gas taxes) for things we need and by Conservatives who are too stupid to see that government is not the problem, government actually is the solution to these global macro issues. Leaving our destiny up to markets is a recipe for booms and busts, not steady cycles. Only government has the mandate, resources and responsibility to investment in solutions for reasons other than short term profits.

[FearlessFreep]

If you raise gas taxes, people will notice they don't need to consume as much gasoline as they thought.

[KillTheMessenger]

You are talking to the wrong person. If I had been on the helm you would have had 100% gas tax 30 years ago and the fleet efficiency standard would now be at least 45mpg.

[DuganS1]

The US govt spent many tens of billions of dollars on ethanol subsidies and how did that impact the price of oil? It didn't. It only resulted in higher corn, soybean, and wheat prices resulting in higher prices at the grocery store. Second, many billions of dollars has been invested in alternative energies already, but demand for alternative energies has gone dramatically down along with the price of oil.

[thedesertdweller]

Conservatives are clueless about this basic fact of life. What if we allowed our personal lives to be dictated solely by our short term concerns? We"d never go to school for a better future, we"d never make plans, never take a lower paying job with a real future, etc. Another words, we"d never create a real life. Same principle applies to public policy.

[racetoinfinity]

Good! I'm glad the greedy so-and-sos were foiled this time.

[KillTheMessenger]

So you think you are not greedy yourself if you want their oil for cheap?

[carrytrade]

I agree. CNBC is in love with everything Saudi and Oil. The $75 is obviously a self-serving ploy, and they provide zero evidence to back it up. It is true that new oil E&P projects are costing more, so the price/barrel matters, but who says we actually want to get at all the oil in this world? Saudi Arabia realizes they are little more than a one-trick pony. Unfortunately for them, the Saudi regime's stability and security depends on oil. One should note, meanwhile, that $75 is far below Iran and Venezuela's breakeven prices. So there is some positive here. In terms of the cuts, it is going to be very hard for Saudi to enforce cuts across all members, so there is another reason for them to be worried.
http://deltahedged.com/2008/12/17/opec-agrees-that-it-intends-to-cut-oil-production/

[KillTheMessenger]

"One should note, meanwhile, that $75 is far below Iran and Venezuela's breakeven prices."

What exactly is positive about destabilizing Iran? Please attach a detailed explanation of the good that can be expected from putting economic pressure on countries which can respond very efficiently with state sponsored terrorism to it.

[cam]

Agreed, moreover what is good about pumping all the world's oil from Saudi Arabia?

Venezuela's oil production cost is around $3/b. It is probably around $10/b once you factor in other costs. The issue is not the breakeven price of oil, it is the cost of servicing Venezuela's massive expenses that requires $75/b.

[carrytrade]

Briefly, the good is that economic leverage opens the door to diplomatic opportunity. Also, states like Iran can not just turn international terror on and off as easily as you think (plus, Iran already bankrolls violence in the Middle East). And the pressure is not coming directly from the West; rather it is coming from market dynamics. So even if Iran could/wanted to lash out with terrorism, they have no direct target to lash out against.
More here: http://deltahedged.com/2008/12/18/huffpo-response/

[dadumdee]

The Venezualan government used $60 a barrel for their 2009 budget projections.

[johnie2xs]

I can't pay attention to OPEC. I'm too busy enjoying the nobility of the Markets, right now.

[murf123]

You just made me choke on my coffee!! LOL