Oil Prices Should Be Lower Now

OPEC Hamstrung by Events Beyond Its Control tells of OPEC's inability to control oil prices today:

"The ability of the Organization of Petroleum Exporting Countries to influence the oil market was hamstrung last week by its inability to enforce internal production targets and two situations largely beyond its control: the euro-zone debt crisis and looming sanctions against Iran.

The group could do little more than maintain the status quo, though strong opinions about the appropriate level of crude production and an acceptable oil price were voiced. Several members raised the possibility that OPEC may meet again to revise production.

OPEC produces around a third of the world's oil and regulates its production in order to influence global crude prices.

After a closed meeting lasting nearly five hours on Thursday, OPEC reached an accord to maintain its current combined oil production ceiling of 30 million barrels a day for its 12 members.

This level, first agreed to in December, has been consistently violated. . . .

"We have an overproduction of oil" and Venezuela is worried about the speed at which prices have fallen recently because of this, said Venezuelan Oil Minister Rafael Ramirez.

Crude-oil futures for West Texas Intermediate, the U.S. benchmark, have tumbled 21% since May 1. Brent crude-oil futures, the European benchmark, have fallen 18% over the same span.

"We could have a situation like we had in 2008, where the price fell to $35 a barrel," Mr. Ramirez added. . . .

"Those crying about too much oil on the market, they could cut it off if they wanted to. But they can't afford to," a senior executive at a major oil company said.

Countries like Venezuela, Iran and Nigeria are so dependent on oil revenues that they have little choice but to continue producing at current volumes, the executive said.

Even if OPEC can enforce its production target, the tremendous flux in oil supply and demand makes it virtually impossible to call the right level of output.

The effects of economic uncertainty in Europe and the European and U.S. sanctions on Iranian oil exports that come into effect next month put OPEC's deliberations in a "genuine data fog," said Barclays in a research note.

"The whirlwind that is engulfing Europe…completely overshadows today's OPEC meeting," said David Hufton of oil brokerage PVM."

{UPDATE ... For an update from Monday's trading, see Crude Drops Below $83:

"Oil futures dropped as rising Spanish bond yields revived worries over Europe's debt crisis, despite a victory of the pro-bailout party in Greece's elections.

Light, sweet crude for July delivery fell $1.69, or 2%, to $82.34 a barrel on the New York Mercantile Exchange. Brent crude on ICE Futures Europe fell $1.94, or 2%, to $95.67 a barrel.

Fears that Greece would depart the euro zone were briefly eased after Sunday's election saw a victory for the center-right party over its radical leftist opponents. But crude prices rallied only modestly before reversing course in European trading, as traders were reminded of the depth of Europe's crisis after Spain's borrowing costs rose past 7%. The level is seen as too high to sustain payments in the long term.

"Now the problems are in Spain, in Italy, with their bond yields going up higher," said Phil Flynn, an analyst at Price Futures Group in Chicago. "We're back in the anti-risk mode, which is driving down the cost of oil."

The 7% mark is seen as significant because it was the level breached by bonds issued by Greece, Portugal and Ireland before they began to lose access to financial markets and sought bailouts.

Traders have been closely following events in Europe because of concerns that the worsening fiscal crisis is slowing economic growth there and elsewhere, damping demand for oil. Crude prices have fallen nearly 25% from their highs this year of $110 a barrel, pummeled by euro-zone jitters."}

My Take

We should be producing as much oil as possible in the U.S. And all other forms of energy as well. In addition, we should be conserving as much as we can, too. Producing more while consuming less should be a national priority.

To me the word "overproduction" used by the Venezuelan representative hereinabove is quite revealing. He's decided to suspend the laws of supply and demand. Fat chance of that.

He must know that there is no such a thing as over or underproduction in a market based system. Of course, he and OPEC officials don't want a market based system. They want to set the prices all by themselves. And that means set them as high as possible.

But supply and demand still set the rules of the game. OPEC is the world's biggest producer at 33% of the total, but they're a cartel made up of many small producers. We produce more than many individual OPEC members. So do Canada, Russia, Brazil, Mexico and others. In my view, it's long past time to render OPEC totally ineffective is setting world oil prices.

Without a monopoly or effective cartel in place, the market based rules of supply and demand will always prevail. And that's what must now occur in oil pricing, too.

If the OPEC cartel, combined with all other producers in the world, produced less oil than the world demanded, the cartel could set its prices higher, of course. And they would do just that.

However, if total demand doesn't match the world's current level of production, prices will fall.

If we produced more oil or conserved more energy, downward pressure on world oil prices would be the inevitable result.

So if Europe is embarking on a severe recession, or if Iran, despite the embargo, produces and ships more of its oil during the next several months, or if we produce more and consume less, or any other combination where more total supply and less total demand is the result, oil prices will fall. That's just the way it is. There is no such thing as overproduction in the long run.

And there is nothing Venezuela, Nigeria, Iran, Saudi Arabia, Russia or other countries can do about it. Since they need all the revenues they can get, they'll keep producing. There is no honor among thieves or cartel members. It's every country for itself. So let's join the fray.

That's why it's so stupid of us not be producing and shipping as much oil (and other energy, too) as possible in the U.S. right now.

By so doing we would drive world prices down further and increase our U.S. jobs and tax revenues, too.

At the margin, we could indeed have a profound and enduring impact on world oil prices.

This is a tremendous opportunity which has no downside risk. Only upside reward.

So what are we waiting for, other than the foot dragging U.S. political class?

Let's kick them all out of office this November, or at least all that we can.

Thanks. Bob.