Friday, December 12, 2008

a quiet war over oil prices

Bloggingstocks | Will crude go up or down before the end of the year? Since it has dropped from $147 in the summer to just above $40 recently and demand is falling, betting on down makes sense.

Americans are using less gas. There is probably little reason to think that will change. Oil imports by China, a huge consumer, dropped in November to their lowest point this year, according to Xinhua news agency.

But, the drop in consumption is a collateral effect of the recession. It is, by some measures, an "accident."

What is not an accident is the need for oil producers to get prices up. Economies including Russia, Venezuela, and Iran count on crude for a great deal of their income and their ability to keep balanced national budgets. Russia, which is not a member of OPEC, will probably work with the cartel to cut production and raise prices.

The market laughed at OPEC cuts in September and oil continued to fall. But members of the cartel are desperate now and will probably take a much different view of what they need to do at their December meeting. Getting oil prices back toward $60 or $70 will be hard, but it is entirely possible.

OPEC ministers have been discussing a production cut of two million barrels a day. It their economic advisers say that is not enough to get prices up sharply, the figure could rise to three million or more.

Prices are going up. OPEC and Russia control too much crude. They can cut supply until the cows come home.