Wednesday, October 22, 2014

Changing Leadership in the Oil Patch ... OPEC's Reign is Over ... North America Takes Control ... I'm Bullish on America's Future

Finally, free market competition is on the verge of replacing the price setting monopoly of the OPEC cartel as OPEC's 40 year dominance of energy markets is finally coming to an end. Accordingly, the countries making up the cartel will no longer be able to ban together and arbitrarily raise global oil prices far in excess of production costs.

In turn, this lack of monopolistic pricing power will have very positive consequences for the world's economy in general, and the U.S. economy specifically.

More consumer spending power, lower business costs, a stronger U.S. dollar, low inflation, low interest rates, higher tax receipts, lower budget deficits, lower unemployment, more high paying jobs and greater national security are just some of the benefits, all of which combine to make the outlook indeed bright for America's future. Now all we need is for our clueless politicians to get out of the way and not screw things up.

Private property, the rule of law, and the unique status of mineral rights ownership in the U.S. have facilitated and made possible this innovation and entrepreneurial activity by American companies. Because in no other country can landowners own mineral rights.

Together with traditional exploration techniques and continued offshore drilling, the 'shale revolution' (tight oil and natural gas) will cause North American producers to replace OPEC as the center of worldwide energy production within the next few years. When coupled with conservation and efficient low cost production resulting from superior technology, demand will replace output as the ultimate price setter, thereby making low price energy plentiful for decades to come.

That all means the end has arrived for OPEC control and monopolistic energy pricing. And declining production costs led by technology, more shale gas and the spread of tight oil production will add more 'fuel' to the good news mix of higher supply and lower prices.

The OPEC cartel has dictated global oil supply and therefore energy prices for more than 40 years. From $3 per barrel in 1973 to more than $150 per barrel just a few short years ago, the cartel has had its way.

But now that's changing, and great things lie ahead for the U.S. economy and our consumers. Canada and Mexico will benefit tremendously as well, thus making North America the most important place in the global oil patch.

Of course, the Saudis, Iranians, Venezuelans, Russians and others won't give up their pricing monopoly easily or willingly, but that's simply no longer their shot to call.

So move over OPEC. North America and the competitive free market are now in charge.

A World Without OPEC tells the good news story:

"Forty-one years ago this month, the Arab oil embargo began. The countries that were part of it belonged, of course, to the Organization of Petroleum Exporting Countries — OPEC — which had banded together 13 years earlier to strengthen their ability to negotiate with international oil companies. The embargo led to widespread shortages in the United States, higher prices at the gas pump and long lines at gas stations. By the time it ended, the price of oil had risen to $12 a barrel from $3.

Perhaps more important than the price increases themselves was the new world order the embargo signaled. The embargo “set in motion geopolitical circumstances that eventually allowed [OPEC] to wrest control over global oil production and pricing from the giant international oil companies — ushering in an era of significantly higher oil prices,” as Amy Myers Jaffe and Ed Morse noted in an article in Foreign Policy magazine that was published last year at the 40th anniversary. Twice a year, OPEC’s oil ministers would meet in Vienna, where they would set oil policy — deciding to either hold back or increase oil production. . . .

(Now) Saudi Arabia has made it clear that it is primarily concerned with not losing market share, so it will continue to pump out oil regardless of the needs of other OPEC members. This is not exactly cartel-like behavior. The next OPEC meeting is scheduled for late November, but there is little likelihood of an agreement.
Thanks to the shale revolution, OPEC has become a paper tiger."
Summing Up
We old folks remember well the days of 30 cents per gallon of gasoline ($1.20 in today's dollars) in the 1960's, and we also vividly recall the seemingly overnight quadrupling of oil prices, along with U.S. price controls, high inflation, a weak economy, setting our thermostats low, and the very long gas lines of the 1970's. It wasn't much fun but we endured.

And to add insult to injury, during those 40 years our politicians limited drilling and output for U.S. oil. As a result, the export of oil was forbidden, further disrupting the free market for petroleum and allowing OPEC to have its way with pricing.
But now North America's entrepreneurial economy will reign supreme in the oil patch.
As for OPEC and their monopolistic price fixing ways, good riddance.

Put it all together, and it's hard not to be bullish on America. I sure am.

That's my take.

Thanks. Bob.

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