More Panic Among Oil Producers

By David L. Brown

Russia has suggested it will join OPEC to cut petroleum exports and thus raise the price of oil. According to a story on Bloomberg.com this morning:

“We have to defend ourselves,” [Russian President Dmitry] Medvedev said in the Ural Mountains city of Kurgan today. “This is our revenue base, both from oil and from gas,” he said. “I believe that we mustn’t rule out any options.”

Defensive measures may include “cutting the volume of oil production and participating in existing organizations of suppliers, and in new organizations, if we can reach such an agreement,” Medvedev said in comments broadcast on state television.

OPEC members will meet on Dec. 17 in Oran, Algeria, to discuss oil output targets. OPEC President Chakib Khelil said Saudi Arabia supports a production cut. Russia, the largest non-OPEC supplier, backs a cut and the country’s deputy prime minister and energy minister will attend the meeting, Khelil said.

“The Oran meeting will decide a severe production cut to stabilize the oil market,” Khelil, who is also Algeria’s oil minister, said in an interview on state radio today. “There is a consensus to reduce production.” The minister didn’t specify the size of the output cut that he would seek.

This is more evidence of the panic that is setting in among oil producers now that prices have dropped far below the levels they were counting on to maintain and even increase their national budgets.

The question is what exactly Russia has to “defend” itself from. The only plausible answer is, from the laws of nature and economics. This is a tinfoil hat response to the drop in oil prices. And it will backfire because by limiting exports the oil producing nations will merely succeed in pushing the world economy downhill further and faster, while encouraging the kind of changes that will reduce the need for oil. Already Americans have reduced their driving by billions of miles since the oil spike earlier this year. Habits are hard to change, but once they do change they tend to stay changed.

In the past OPEC tended to cut oil prices whenever it appeared that the commodity was priced high enough to change demand and encourage alternatives. Now they are on the other side of the equation, trying to push prices as high as they can. This is economic suicide for them.

Don’t get me wrong: I do believe that oil prices will go back up, and they need to because we cannot expect producers to deliver oil at below the cost of production. If on the average it it costs around $80 a barrel to produce oil, then we will have to pay at least that much or supplies will dry up. Only those with low-cost production will be able to continue, and that would mean even worst economic trouble for the West not to mention the collapse of the producing nations’ economies.

Those with production costs at the high end of the scale will probably cease to produce oil, meaning that supplies will drop no matter what OPEC and Russia do. But the oil price spikes of the past year have demonstrated that the world economy has no ability to support oil prices in the $140 range. That event has triggered an unprecedented economic crisis, affecting not least the auto industry.

As we have discussed here many times, the world economy was based on growing supplies of cheap oil. Now we are facing falling supplies of ever more expensive oil. We are on the downhill side of the Peak Oil curve, and no amount of “defensive” actions by Russia and OPEC will change that fact. The more they try to force prices higher, the faster the world will back away from the petroleum economy.

A price in the range of $80 to $100 a barrel can be expected, and that will actually be good for the West because it will allow our economies to stabilize while still providing plenty of incentive for development of alternative energy resources, conservation, and other moves away from addiction to imported oil. It would have the further benefit of moderating the instability on the producing side of the economic see-saw without giving dangerous nations such as Iran, Russia and Venezuela massive infusions of cash that would likely be put to use for evil purposes.

And, why should Russia have to join OPEC to lower its exports? Why, I’m glad you asked that question. The answer is: Because OPEC is an international cartel that amounts to a criminal conspiracy against the West and thieves, like birds, flock together.

It’s time to put everything we can into knocking the underpinning out from under the conspirators and sending them back to their traditional roles as goat herders, camel merchants, vodka consumers or what have you.

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