Oil hit a four-year low in yesterday’s trading, dipping slightly below $40 per barrel before rising slightly to finish at $40.06. Prices fell almost ten percent, $3.54, as global demand declined in the face of a serious recession that doesn’t have an end in sight. Gasoline inventories rose in the US as demand continues to drop. In the midst of the collapse in oil markets, OPEC has promised a production cut — but can it deliver?
The OPEC cartel agreed on Wednesday to reduce production by 2.2 million barrels a day, the group’s largest cut ever, in an effort to put a floor on falling oil prices.
It is the third time producers have agreed to reduce their output in three months. Since September, members of the Organization of the Petroleum Exporting Countries have pledged cuts totaling 4.2 million barrels a day, or nearly 12 percent of their capacity, a record in such a short time.
OPEC has rarely gotten cooperation from its own members, let alone non-member producers, on production cuts. They’re not likely to start a winning streak now, and for some good reasons. No one foresaw the scale of this collapse, and most OPEC nations made assumptions that oil prices would go up or decline slightly at worst this year when planning their economies. When oil peaked at $147, most analysts predicted $200 per barrel oil, and the producer nations planned their spending accordingly.
Investors understand these dynamics, which is why they’ve roundly ignored OPEC statements during the collapse of the bubble. First OPEC was going to hold the line at $80, then $70, and in some cases those statements came as price drops rendered their claims moot even as they spoke them. Now OPEC will be lucky if oil doesn’t hit $20 per barrel at the bottom of the market. They’ll have to sell as much as possible to keep their own economies afloat at these prices, which means that OPEC is all talk.
I certainly hope so. The other danger here is the potential of war. Russia, Iran, or any one of several other countries may get desperate enough to do more than just rattle some sabres in order to drive up the price of oil. It's happened before, so there's plenty of precedent. If Obama can present a strong America to counter that sort of aggression, we should be able to avoid most of that kind of crisis.
So, get ready for war.
But back to oil in particular. For a great explanation of the winners and losers in the oil price teeter-totter, go here. Very interesting stuff.
The real reason I wanted to post about oil is the story you haven't seen. Think back about four months - when gas was over $4/gallon and oil was predicted to reach $200/barrel, who was the eeeeeevil culprit of the economic hardship? Speculators. So, why aren't we seeing story after story now about how those same eeeeeevil speculators are driving prices down?
Okay, the most obvious answer is that we like those low prices. But, I would suggest something even more important...the free market. Sure, speculators and other factors have an effect on the price of oil, but the main driver is -- as I've always maintained -- the free market, specifically the law of supply and demand. When supply goes down, price goes up; when supply goes up, price goes down. Over the past six months, we've seen both sides of the pendulum.
So, the next time someone lashes out at the eeeeeevil speculators, or when Congress parades the oil execs for a public grilling, don't buy it. Just take a look a how much people are driving, and how much oil is being consumed. Chances are extremely good that that will give you a much more accurate picture of what's really going on.
Oh, and by the way, doesn't this just illustrate yet again how the free market does wonders to correct itself, and properly value products? Hm. Maybe someone should tell Congress that's a pretty good system, and that maybe they should look into it rather than bailout socialism.
There's my two cents.
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