
Oil prices are responding to supply and demand, not OPEC - wojer
http://www.economist.com/news/finance/21678198-once-prices-are-responding-supply-and-demand-not-opec-why-market
======
xux
That's like say someone didn't kick you in the face, physics kicked you in the
face!

Of course it's supply and demand, and OPEC is manipulating the market by
oversupplying the market and driving every other player out of business. On
the surface, it seems like they're doing everyone a favor by driving the price
down, but as soon as other players exit, they'll raise it up sky high as the
monopoly supplier.

This is a classic strategy that is now outlawed in the U.S. because of what
Standard Oil / Rocketfeller did in the 19th century. OPEC is getting away with
it because there's no international law that forbids predatory pricing.

Don't let the Saudis fool you. Oil accounts for 80% of their GDP and the low
price is completely unsustainable for them. They have no intention of keeping
the price low forever, just long enough to burn other producers.

~~~
pmelendez
> Of course it's supply and demand, and OPEC is manipulating the market by
> oversupplying the market

I don't think that is true. OPEC production hasn't been greater than how it
was in Apr 2012 or Apr 2008 [1]

Non-OPEC production on the other hand... well ... [2]

[1] [http://oilprice.com/Energy/Crude-Oil/OPEC-Production-By-
The-...](http://oilprice.com/Energy/Crude-Oil/OPEC-Production-By-The-
Numbers.html)

[2] [http://peakoilbarrel.com/non-opec-charts/](http://peakoilbarrel.com/non-
opec-charts/)

~~~
xux
OPEC Pumps at Three-Year High Despite Oil Glut

[http://www.wsj.com/articles/opec-pumps-at-three-year-high-
de...](http://www.wsj.com/articles/opec-pumps-at-three-year-high-despite-
oversupply-1439290204)

Relevant paragraph: "But in the current downward price spiral, the group has
kept pumping, a move aimed at protecting market share, instead of prices. The
strategy comes as a flood of new oil—including U.S. shale output and new OPEC
production—hits at a time when demand forecasts remain cloudy. The result has
been market oversupply, and sharply falling prices."

~~~
zubiaur
Why should the OPEC stop pumping? Why is it expected that the OPEC has to
regulate prices?

Lifting prices, the cost of bringing oil to the surface, are much higher in
the US than in the most important OPEC producers. Regulating the price by
limiting supply would benefit non OPEC, high lifting cost producers the most.
This are different times, now OPEC is letting the market, governed by supply
and demand set the prices.

The expectation before was that non OPEC countries would produce as much as
they could and OPEC would supply the leftover demand. It was called "The Call
on OPEC" that was back when the US was a net importer. Now the US producers
more oil than what it imports. Heck, is producing more oil than Saudi Arabia!

This article explain quite well how the call on OPEC used to work and why it
is crazy in today's environment:

[http://blogs.platts.com/2015/01/02/opec-call-price-
collapse/](http://blogs.platts.com/2015/01/02/opec-call-price-collapse/)

Edit: excuse my English, is not m my native language and this was written on a
phone.

~~~
revelation
For the US government, it doesn't matter particularly if OPEC keeps the level
of supply up or not; low oil prices may cause the local oil production to
stall but they also dramatically help all other branches of the US economy. If
supply goes down and prices up, the exports will just resume again.

Saudi Arabia and other OPEC members however need high prices, they are not
just a mere luxury to them. They may have $10 lifting costs but they have
overextended their state budget by relying on oil profits to the point where
they need a $80+ price to just maintain the status quo. They have no
meaningful other economy.

~~~
zubiaur
Absolutely.

What are their alternatives though? If they limit supply to keep artificially
high prices they will still get a diminished accumulated income due to market
share erosion. They will also encourage investment in oil producing capacity
outside OPEC, risking further market share erosion.

If they let supply and demand set the price it will eventually drive high OPEX
producers out of business, somewhat mitigating their losses in market share
and with the possibility for them to recover some of their lost income. It's a
matter of high OPEX products going out of business before they run out of cash
reserves

------
vinceguidry
> Only rarely, says Jason Bordoff, director of Columbia University’s Centre on
> Global Energy Policy, has the oil market behaved like a normal market, more
> subject to the laws of supply and demand than to the whims of a cartel. Now
> is one of them.

We've forgotten what the oil market was like before Standard Oil. First off,
cars didn't exist, uses for oil were limited to small-ish industrial products
like lubricants, and for lamps. There certainly wasn't anything like today's
power infrastructure, internal-combustion engines had yet to be invented.

Oil producers were an unruly lot responding mostly to immediate financial
needs rather than long-term business planning. Oil was a niche product with
vast differences in quality among refiners. Only the affluent could really
afford to regularly light their lamps at night.

Rockefeller changed all that, virtually overnight. He wrangled the impossible-
to-deal-with oilmen and standardized the refining process, something that had
to happen before it was possible to invent the automobile. Standard Oil, more
than any other person or company, created the world we live in. Without
Rockefeller, cars wouldn't have been possible. Oil power plants wouldn't have
been possible. Without oil, we'd still be using coal.

Cartels stabilize violent markets and allow industries to mature and build on
top of a stable status quo. Eventually civilization moves in, and brings
regulation and massive capital infusion. That's obviously better than the
cartel, but don't mistake things, cartels are vastly better than the states of
affairs they grow out of.

~~~
CyberDildonics
Not the diamond cartel

------
brownbat
> One big question is how quickly frackers would ramp up production again if
> oil prices rise.

What would Nash say about this?

a) Stable: Saudis: production high, prices low. US: shale not developed.
(OPEC: no "cheating," production adjusts to price.)

b) Unstable: SA: low supply. OPEC: cheating. US: shale.

c) Unstable: SA: whiplash production and hopefully prices to continually scare
US producers out of market. OPEC members desiring predictable revenues revolt
/ periodic shortfalls make cheating rampant. US: prep work / tech developments
for quick spin-up shale projects. Or, big tanks: Massive arbitrage
opportunities emerge for futures and warehousing, cutting against SA's ability
to control prices.

Good article, but I think there's reason to believe SA (or really, US shale)
has put a ceiling on oil that isn't going to budge for a while.

(OTOH, oil price forecasting has historically ranked highly among foolish
human endeavors... )

------
PhantomGremlin
Sigh. The clowns at The Economist are probably once again signalling the
bottom. I still remember their classic drivel from 1999:

    
    
       Yet here is a thought: $10 might
       actually be too optimistic.
       We may be heading for $5.
    

[http://www.economist.com/node/188181](http://www.economist.com/node/188181)

Have they ever apologized for that? I notice that _they_ didn't bother linking
to their earlier article.

------
sgt101
Incredibly misleading graph with one line moving 6% and the other line moving
60% but the axis pruned to make it look like there is a relationship.

------
transfire
If you believe that, I have an Alzheimer's cure to sell you.

