"The death of OPEC"

[phantom power]

Saudi Arabia walked out on OPEC yesterday, saying it would not honor the cartel's production cut. It was tired of rants from Hugo Chavez of Venezuela and the well-dressed oil minister from Iran.

As the world's largest crude exporter, the kingdom in the desert took its ball and went home.

As the Saudis left the building, the message was shockingly clear. “Saudi Arabia will meet the market’s demand,” a senior OPEC delegate told the New York Times. “We will see what the market requires and we will not leave a customer without oil."

OPEC will still have lavish meetings and a nifty headquarters in Vienna, Austria, but the Saudis have made certain the the organization has lost its teeth. Even though the cartel argued that the sudden drop in crude was due to "oversupply", OPEC's most powerful member knows that the drop may only be temporary. Cold weather later this year could put pressure on prices. So could a decision by Russia that it wants to "punish" the US and EU for a time. That political battle is only at its beginning.

http://blogs.moneycentral.msn.com/topstocks/archive/2008/09/11/the-death-of-opec.aspx

[lapfog_1]

1. The Saudis biggest fear

is that oil prices go up just before the US election.

If Obama wins, we might actually move away from oil to power our economy, no matter what the price of oil does in the future.

With McCain, no worries (for them).

[phantom power]

2. I think the Saudis may fear their own power to destabilize the world economy.

In other words, it may have occurred to them that they were already comfortably rich when oil was selling at $20/barrel. And the world was a lot more stable when it was. At $100/barrel, or $150/barrel, it's not fun anymore. Everybody in the saloon is reaching for their guns and knives.

I bet this isn't an easy conversation for OPEC to have. It's no small thing to voluntarily reduce the size of one's wind-fall. In fact, the resulting differences of opinion may be causing OPEC to fly apart at the seams.

[Nederland]

6. No

Their biggest fear is that high oil prices will result in the development of alternatives. Believe me, when it comes to money allocated to finding alternatives to oil, the difference between Obama and McCain are a drop in the bucket compared to market forces. With oil at $140, the incentive to find alternatives is incredible, resulting in billions of dollars of investor money flowing into that space. At $80, not so much.

[The Croquist]

3. I wish it was true but I doubt it.

From memory:
In the past Saudi Arabia used to cut production to shore up OPEC when other OPEC members would cheat on their quotas in order to keep prices up. This would go on for a few years until they would get fed up and then they would start pumping their full quota. The price of oil would drop dramatically, the rest of OPEC would realize that they screwed up, agreed to cut production back to their quota and the price would creep back up. A few years later they would start cheating again and the cycle would repeat.

I agree with another poster in thinking that Saudi Arabia thinks they've got a good thing going and they don't want to screw it up.

It may be true that they would rather have McCain as President but I'm not so sure. I think they want the US to protect them from Iran and revolution (and probably think McCain is more likely to do this) but they also want us out of the Middle East (and probably think Obama is more likely to do this). I don't know what they are thinking. I don't think they are into exporting terrorism as much as they are into making money. Individual Saudis are but not the leadership.

[happyslug]

4. Has Saudi Arabia lost control over the price of oil?

Remember the power of Saudi Arabia since the 1970s has been that it alone can and has set the price for oil. If the House of Saud thought the price was to high, they would increase production, if the price was to low, they would decrease production. That all the house of Saud has to do, and they could do that now IF THEY WERE STILL THE SWING PRODUCER (i.e. the producer with excess capability so that by controlling that excess capability they set the price of oil). The problem seems to be the House of Saud has lost control, and now OPEC wants to control production (I mean OPEC wants to control, this will be a new versing of OPEC.

The Three Versions of OPEC is as follows:

The First version was from 1960 when OPEC was founded till 1973, then Texas was the world's swing producer and set the price of oil via the Texas Railroad Commission. OPEC at that time period was just an Convenient place for the oil companies to tell the OPEC members want the price the Oil Companies were going to pay for OPEC's oil (The Price was set by the Texas Railroad Commission with its power to restrict oil production in the State of Texas, which the Commission did with a balance between what the oil companies received AND what the price of Gasoline was in the US).

The Second Version came out of the peaking of US oil production in 1969. With demand at its highest and domestic supplies no long able to supply all of the oil the US used, the Texas Railroad Commission lost its ability to set world oil prices. This situation lasted for about 4-5 years till Saudi Arabia found that it had the ability to set price and started to do so in the mid-1970s as OPEC itself failed to do so (This increased with the Iranian Revolution in 1979, which saw OPEC members Iran and Iraq selling a much oil as possible to fund the Iranian-Iraqi War of the 1980s. The additional complication of the North Sea, North Slope and the Siberian Super Giant oil fields coming on line in the mid 1980s combined with Cheating by Nigeria, Iran and Iraq over oil production produced the "Oil Glut" of the mid 1980s. This lead to a race to the bottom, lead by Thatcher and her control over North Sea Oil. Saudi Arabia finally had enough and increased production so that the price of oil dropped below the production cost of the North Sea. This was to show Thacher and the rest of the world WHO sets the world wide price of oil and that was Saudi Arabia (Thacher got the message, a few months later Saudi Arabia decreased production and set price, instead of setting North Sea oil BELOW the price charged by the House of Saud, she just matched the price. This fully established the House of Saud as the "Swing" Producer of oil and thus the group that sets the price.

The Third Version is what OPEC is becoming now, it has ceased to be a place where Saudi Arabia tells the other members what the price of oil will be. OPEC has to become a true Cartel OR cease to function. OPEC members (other then Saudi Arabia) seems to what it to become a true cartel, i.e. control the price of oil. The OPEC members are in the strongest position for this since the oil Crisis of the early 1970s (OPEC is expected in the next few years to produce 50% of world wide oil, up from the 35 % in the 1990s and up even from the 40% of the 1970s). This will mean the remaining oil producers plan to work together (and that includes Russia based on earlier reports) to keep the price up, even if that means a drop in oil production. Over time most Cartel fail, sooner or later one of its members cheat and that forces the rest to cheat (To a degree this is what happened in the 1980s). Given peak il, many OPEC members will NO LONGER be able to increase production, thus they can not cheat even if they want to. Thus OPEC may work this time, but do to the fact no one will be able to control the price of oil and OPEC will just become a place where the price of oil is told to the world instead of actually setting price (And the House of Saud fears this lost of power, for since the 1970s it has set the price of oil and now the House of Saud can no longer do that, it is this lost of power that lead to Saudi Arabia's pull out of OPEC not anything else).

[Viking12]

5. OPEC, "The rumors of my demise are greatly exagerrated"

Forbes has a much different take:

LONDON - It will take several weeks before the number crunchers close to the ground determine just how effective OPEC's plea to end excess production will be. But already it seems unlikely that Saudi Arabia, the oil-exporting cartel's biggest producer, would choose to brazenly flout the guidelines and risk an open rift with the group.

Saudi Arabia is currently the biggest culprit of overproduction, having unilaterally uncorked around 500,000 barrels of oil a day above its quota this year. (See "OPEC's Kingdom Built On Sand.") Although it is certainly a dove when it comes to throwing lifelines to the energy markets, oil is now in a bear trajectory, and that means the kingdom's desire to break from the pack is unlikely to be strong.

"Undermining OPEC is not in Saudi Arabia's interests," said Samuel Ciszuk, analyst with Global Insight. He said that the only time the kingdom had obviously flouted the cartel was in the late 1980s, when it responded to its fellow members' overproduction by turning on its own taps at full pelt; the result was oil crashing to $15 a barrel.


In other words, Saudi Arabia is far from a rogue member of OPEC. One Kuwaiti analyst, Kamel al-Harami, told Agence France-Presse that the cartel would do little until December, when it would make a "final" decision on cuts.

http://www.forbes.com/markets/2008/09/11/oil-saudi-opec-markets-commodities-cx_ll_0911markets20.html