Less than two years ago, in December 2004, Ali al-Naimi, the erstwhile president of the Organization of Petroleum Exporting Countries and Saudi Arabia's oil minister, told reporters that the OPEC "price band" of $22 to $28 barrel was still in place. He hastened to add that producers and consumers all seemed to agree that $30 a barrel was a fair price. That was then. This is now.
On Thursday, OPEC announced that it would cut a million barrels/day from its current quota of 28 million barrels a day in an effort to keep prices in the $60 a barrel range -- double the "fair price" of 2004. This move came just 10 weeks after crude hit the undreamed of heights $78 a barrel.
As an aside, it is ironically Kuwait, the major beneficiary of the United States' confrontations with the Hussein regime, that has been the most aggressive of the Gulf States militating for a production cut. Thank you, Kuwait.
For once, the Department of Energy took a stand and Secretary Samuel W. Bodman properly chastised OPEC, saying that "The price is still close to all-time highs and I think it's very important that there be no overreaction on the part of OPEC. . . . this is not the time for OPEC to reduce available supply. . . . We are moving into the heating season . . . and I would like to see the oil they are now going to cut restored".
In some way, OPEC's so-called cuts are cosmetic. The world has a surfeit of oil. Only yesterday, U.S. inventories were shown to have increased by some 3 million barrels from the previous week. That off-take -- that is, cargo loadings from OPEC sources -- is well below the 28-million-barrel quota. In some respects, OPEC is trying to put its best face on the current reality of slowing demand and additional non OPEC supply, and show it is still in control of market forces.
Is it? That remains to be seen. But it is now perfectly clear, if, for whatever reason it wasn't before, is that OPEC in collusion with its national producers, is fully prepared to rig markets by curtailing available supply. These actions are a clear violation of the World Trade Organization (WTO) rules that prohibit quantitative restrictions in a conspiracy to affect export and world prices. Ironically Saudi Arabia gained membership to the WTO last year, under the auspices and with the help of our administration.
In that OPEC is clearly prepared to flout WTO regulations with regard to production cuts, it's not a great leap to presume that it would be equally prepared to manipulate oil futures trading on world commodity exchanges. Given that oil product transactions are based on these prices, that trading in them is largely unregulated, and that there are enormous financial resources available to the OPEC producers, such a calculated undertaking would seem in line with their objectives.
That OPEC would take measures to prop up its artificial and excessive prices reveals the degree to which cartel has no interest in the well being of the world's economies. I am not confusing OPEC with the Red Cross, but there must be a reasonable give and take between responsible suppliers and customers, especially when the two are so interdependent. OPEC's rapaciousness has long since reached the limits of tolerance. It clearly cannot be trusted and it is high time we stepped up our search for all manner of alternatives.
A dream scenario: Suppose, just suppose, we had a government with the foresight and courage to establish a national gasoline consumption cap, and a system to distribute it fairly (in my post "Breaking Oil's Price, Curtailing Gas Consumption, Regaining Our Self Respect" 08/14/06, I outlined a voucher system based on the current emissions cap and trade program- but other ideas should be forthcoming as well, and should be welcomed). With a workable system in place, the United States would be able to respond to OPEC's curtaiments by saying, in essence, "Fine, you cut production, we as a nation will cut consumption proportionally." OPEC's game would quickly come to an end, and we would have regained our sense of self-reliance.