06/09/2006 06:28 pm ET Updated May 25, 2011

OPEC Met Last Week in Caracas: That Was a Finger You Saw in the Distance, Not an Oil Rig

Venezuela's President Hugo Chavez regaled his Organization of Oil Exporting Countries (OPEC) brethren last week sparing no expense: fleets of limos ferried delegates around Caracas and sumptuous banquets were the order of the day. Packed press galleries recorded every move. Then the gracious host seized the opportunity to deliver a socio-cum-history lesson: "We are Third World countries that for years and years, have suffered colonialism". Venezuela's energy minister Rafael Ramirez, followed up with a dire warning to his fellow OPEC cartel guests "The stability of our countries is in danger because of the terrorism from states that want to take our oil reserves".

Besides the belligerent and inflammatory rhetoric, was the usual spin about supply constraints and galloping consumption all couched to produce the illusion of shortage and limited capability to meet the growing pressures of demand (see "Oil Is Not Scarce-The Oil Industry Continues to Play Us For Fools," 05/24/06). The aim of course is to explain away today and rationalize today's staggeringly high price for oil.

Before Chavez's Presidency Venezuela had plans to double its production from its then 3.5 million barrels a day to 7 million barrels a day . Once in office by having purged Petroleos de Venezuela, Venezuela's national oil company, Chavez presided over a drop in production to 2.5 million barrels a day. He thereupon successfully launched a campaign to persuade other OPEC members that output reductions, not investment in expanded production, were the key to higher oil prices and revenue.

OPEC has since been successful beyond its wildest dreams. Since the late 1990's the price of oil has increased seven fold. Meanwhile the world's consumers have been subjected to a constant replay of the good cop/ bad cop routine while being slammed with extortionist increases in price. Venezuela and Iran don the bad cop uniforms, ever pushing for greater production limits and higher prices, while Saudi Arabia and a few others, behind winks and nods, put on the good cop uniform.
These now newly designated "Third World" countries i.e. Saudi Arabia and the United Arab Emirates protest, through crocodile tears, that further cuts would undermine the world economy by raising prices (a refrain heard since prices headed north of $35/bbl), all the while basking in the glow of $70 crude while playing OPEC's tune as others sang its song.

Then to add insult to injury Saudi Arabia announces, as it did a few weeks ago, with all appropriate fanfare, that it will graciously invest $50 billion dollars through 2009 to increase its oil production capability to 12.5 million barrels a day. Thank you, Saudi Arabia. This particular promise has been floating around since 2004 but nothing has been done to fulfill it. The Saudi's, who have done little or no further prospecting for oil in the last 25 years, are currently pumping oil from some 15 of their 80 known potential oil fields. This loudly proclaimed $50 billion "investment" represents but six days of oil income at current prices for each year of the expansion program, hardly another Manhattan Project. But then again, at $70 a barrel being a "Third World" country has got to be tough. Apart from the promises made since 2004 what is rarely mentioned or long forgotten is that back in the seventies Saudi Aramco put forward a plan, to increase production to 20 million barrels a day in twenty years time, an indication of the true dimensions of their potential capabilities and of their reserves certainly far beyond those we are told about. That plan of course was never instituted.

Some may believe (I am not among them) that in this interdependent world that OPEC has a sovereign right to collude and withhold such a key resource as oil from the market in order to manipulate price. Everyone has a right to believe whatever they wish, but please, let us not allow ourselves to be played for fools. Any shortage of crude is a contrivance, a willful shortage of production capacity to manipulate price. Whether the world is consuming more than it should or not, is another issue altogether.

When it comes to oil we are being had. As a result the United States and other nations are transferring our wealth, and perhaps our future, to malicious regimes and saying thank you all the while. In psychology it's known as the "Stockholm syndrome." Perhaps, when it comes to oil, that should now be changed to the "Caracas syndrome."