Monday, 22 September 2008
An Interesting Note On Oil Prices
Last week OPEC voted to cut production in order to keep a barrel of oil around $100 a barrel. An interesting development occurred after the meeting. It appears that Saudi Arabia told OPEC to shove it.
Hours after suffering a rare setback in a negotiating session at OPEC's headquarters, Saudi Arabian officials assured world markets on Wednesday that they would ignore the wishes of other cartel members and continue to pump plenty of oil.
OPEC for years has been a cartel that has controlled the price of oil. They have always stuck together in order to avoid free market competition. Allowing them to set the price of oil at whatever artificial level they desired. Therefore, I think it is a big deal that Saudi Arabia, OPEC's biggest member, has decided to buck the organization.
While the move is a bit shocking, I am not surprised. I have wondered now for some time if the OPEC countries weren't shooting themselves in the foot by keeping the price of oil so high. It opens the door for alternative sources of energy like Shale. It wouldn't be possible to extract oil from shale at prices less than $70 a barrel. As long as oil barrel prices remain high, it becomes economically feasible to process these alternative sources.
If a successful replacement for crude oil is found and developed, the price of crude will plummet. Once a replacement is finally developed their is no way to put the cat back in the bag. Saudi Arabia knows it. They realize that the U.S. is serious this time about energy independence and have the technical ability to make it happen. I believe that is the reason they want to start pushing the price of oil back down. The question is to what price do they want take oil? I am guessing they want to take it back into the 60's. A level that would make it economically impractical to develop alternative sources. They would rather ride this train as long as possible rather than face the prospect of competition which could make their product worthless.
Unfortunately for Saudi Arabia, the other members of OPEC are dictatorial thugs that care only about the present. They need the money from $100 a barrel oil to prop up their failed governments. It will be interesting to see how this battle between the various OPEC nations plays out in the coming months.
