OPEC issues bizarre oil threat, Financial Times also confused

NPR’s Marketplace called me today for comments on this bizarre Financial Times article, “Opec to seek assurances on oil demand.

Apparently these absurdly rich countries — with projected revenues of $658 billion this year — who are selling their product at nearly $100 a barrel, are threatening not to invest in new production unless the consuming countries promise to maintain demand. Seriously! No, seriously:

Opec will this week seek assurances from some of the world’s biggest oil consumers that they will maintain their demand as the members of the oil cartel come under intense pressure to boost investment in production capacity.

This is the dumbest thing I’ve ever heard, which is saying a lot, considering who our President is. First off, who exactly can speak for the consuming nations and make a binding promise to keep up demand in the face of record-breaking prices? Nobody. This is capitalism. If high prices lead to fuel-switching, how could, say, President Bush, promise to stop it — especially since he has already promised to encourage fuel switching?

Second, as I blogged recently (“Get used to high oil prices“), pretty much every producing country, except Saudi Arabia, is producing flat out. Yet demand keeps going up even at these prices. If OPEC is really worried about demand destruction, then they should want to invest in as much new production as quickly as possible. Indeed, the IEA predicted back in July (“IEA warns of impending oil and gas supply crunch“) the world will see “increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012.”

Third, IEA projects global oil demand will “expand by 1.9 million barrels a day, or 2.2% a year on average, reaching 95.8 million barrels a day by 2012, up from 86.13 million barrels a day this year.” OPEC would be crazy not to invest in as much new supply as they could to meet this demand. Where is a better place for their money — holding dollars?

So what is the really motive behind this bizarre threat? And how is the normally dependable Financial Times confused?

Let’s start with the FT, which writes:

Consumer countries, in particular the US and in Europe, are investing in alternative sources of energy, such as biofuels and nuclear power, and energy-saving measures to reduce their dependency on crude oil and combat global warming.

Some Opec countries are worried such moves could jeopardise future demand just as they embark on expansion plans. “The declaration will be a statement on oil relations as seen by Opec,” said one cartel source, referring to a draft of the statement.

Well, first off, nuclear power doesn’t substitute for oil in most countries, certainly not the West, since we don’t burn much oil to make electricity. Why? It’s too damn expensive! [Note to FT: Please stop including “nuclear power” among the “alternative sources of energy” — it has been a leading source of energy for decades now.]

Second — and it isn’t clear just who is confused here, OPEC or FT, or both — but alternatives and efficiency take a long, long time to kick in, assuming they are even adopted. Heck, even with nearly $100 a barrel oil, the Congress may not deliver the president an energy bill with an increase in fuel economy standards — and Bush may veto it anyway — and that increase would be so wimpy that it at best it will slow our demand growth.

I’m a little surprised FT bought OPEC’s bizarre public explanation for its threat. A much more likely explanation for the threat is that OPEC is sending a warning to alternative fuel providers — and those who finance them — that they are prepared to increase production enough to crash prices and render the alt fuels uneconomical. Since I don’t think OPEC has the ability to increase production that fast, I think it is a meaningless threat, but I suppose it could have some impact on those companies who don’t read this blog or are otherwise poorly-informed.

I don’t think $100 a barrel is enough to get our leaders off their butts and on to the serious task of getting us off of oil. Only a genuine recognition of the threat posed by global warming has any chance to do that.

I should be on Marketplace tonight, and I’ll post a link to the interview when it is available.

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8 Responses to OPEC issues bizarre oil threat, Financial Times also confused

  1. Gary Herstein says:

    “First off, who exactly can speak for the consuming nations and make a binding promise to keep up demand in the face of record-breaking prices? Nobody. This is capitalism.”

    Permit me a quibble: the issue here is not capitalism, but market economy. The two are not the same. There have been non-capitalistic market economies (Yugoslavia, Czechoslovakia to varying degrees), and non-market capitalisms (Nazi Germany, some of the more aggressively planned Asian systems). I realize this is rather off the main topic here, but it is a distinction worth making.

  2. Eric Sutherland says:

    Things are getting strange. At what point will hoard economics kick in? Very few commodities have been depleted into scarcity mode. None that did not have some sort of competive replacement. Oil is different. Hoarding economics is different. Economists have little to no insight into what happens when a market is dominated by purchases dedicated for long term personal reserves.

    Marketplace is produced by Public Radio International. A separate network from NPR.

  3. Joe says:

    “Marketplace is produced in Los Angeles by American Public Media in association with the University of Southern California.”

    Not sure it is wrong to say “NPR’s Marketplace,” though, since it airs on NPR. Like saying “Fox’s American Idol.”

  4. Eric Sutherland says:

    Oil ministers of OPEC countries are rightfully worried. I am sure that any day now American’s are going to start waking up by the millions and discovering what a bunch of pigs they are.

    And then as soon as you are done laughing…

    Some of the best urban legends floating around are stories of land barons in Wyoming that have just shut off the motors on the heads of productive wells. Who needs more taxable revenue from commodity sales when the sports franchises are doing well?

    How long before the overlords of proven reserves decide that wages of production are not good enough, they are being paid with counterfeit money?

    Everybody needs a good conspiracy theory once in a while.

  5. Shannon says:

    We need the high prices to encourage conservation and/or substitution with other fuels- these are the only reliable ways other than government restrictions to make gasoline demand more elastic.

    I believe that the Petroleum industry is trying to have its cake and eat it too- it wants to tell us that it has reached Peak Oil so that we will swallow whatever prices come our way, and it wants us to commit to petroleum for years to come lest it reduce production. I think these guys know they are on the way out and want to make as much money as they can before we switch fuels. They are basically blackmailing us while making record profits.

  6. Ronald says:

    Obviously this is coming from an old timer at OPEC who remembers 1980 when they got 34 dollars a barrel for a few months and then in 1986 when the price went down to, if I remember right, 12 dollars a barrel.

    You might want to look up a quote from george bush during the 2000 presidential campaign where george complained about how Clinton/Gore should be able to reduce the price of oil by just being president and telling OPEC they should reduce the price. Try to get it out to the MSM.

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  8. Ronald says:

    in today’s New York Times…”WAYNE, Mich., June 27 — Gov. George W. Bush of Texas said today that if he was president [sic], he would bring down gasoline prices through sheer force of personality, by creating enough political good will with oil-producing nations that they would increase their supply of crude. “I would work with our friends in OPEC to convince them to open up the spigot, to increase the supply,” Mr. Bush, the presumptive Republican candidate for president, told reporters here today. “Use the capital that my administration will earn, with the Kuwaitis or the Saudis, and convince them to open up the spigot.””

    I found this quote from George Bush during the 2000 presidential campaign. What an easy way to fix a problem, just ask them nicely.

    More from this website on how Bush was going to solve higher oil prices then. (in 2000)