The Death of OPEC: Saudi Arabia walks out

[Caelius]

The title pretty much says it all.

Source

Saudi Arabia walked out on OPEC yesterday, saying it would not honor the cartel's production cut. It was tired of rants from Hugo Chavez of Venezuela and the well-dressed oil minister from Iran.

As the world's largest crude exporter, the kingdom in the desert took its ball and went home.

As the Saudis left the building, the message was shockingly clear. “Saudi Arabia will meet the market’s demand,” a senior OPEC delegate told the New York Times. “We will see what the market requires and we will not leave a customer without oil."

OPEC will still have lavish meetings and a nifty headquarters in Vienna, Austria, but the Saudis have made certain the the organization has lost its teeth. Even though the cartel argued that the sudden drop in crude was due to "oversupply", OPEC's most powerful member knows that the drop may only be temporary. Cold weather later this year could put pressure on prices. So could a decision by Russia that it wants to "punish" the U.S. and European Union for a time. That political battle is only at its beginning.

The downward pressure on oil got a second hand. Brazil has confirmed another huge oil deposit to add to one it discovered off-shore earlier this year. The first field uncovered by Petrobras has the promise of being one of the largest in the world. The breadth of that deposit has now expanded.

OPEC needs the Saudis to have any credibility in terms of pricing, supply, and the ongoing success of its bully pulpit. By failing to keep its most critical member, it forfeits its leverage.

OPEC has made no announcement about any possibility of dissolving, but the process is already over.

[Philos Sophos]

War is coming...

[Caelius]

Petroleum just slipped below 100 dollars for the first time in 5 months to boot.

Wow to say the least.

[Sphere]

“We will see what the market requires and we will not leave a customer without oil."

This makes no sense, limiting supply is in Saudi Arabia's best interest. They will not maximize profits at prices set by the market, and as mentioned above, when OPEC agreements fall apart oil prices plumet. And as the largest supplier in the cartel, if they refuse to follow supply restrictions, none of the other countries will either.

What are they thinking?

[Farnan]

This makes no sense, limiting supply is in Saudi Arabia's best interest. They will not maximize profits at prices set by the market. And as the largest supplier in the cartel, if they refuse to follow supply restrictions, none of the other countries will either.

What are they thinking?

That if they increase the price higher they would lose it all as it would increase the incentives for more gas effecient vehicles and alternative energy.

[Sphere]

That if they increase the price higher they would lose it all as it would increase the incentives for more gas effecient vehicles and alternative energy.

Thats assuming oil is a very elastic good, which it certainly is not. I mean the US oil was over $4 dollars (I remember when it was less than $1) and consumption dropped all of 3%. Thats a %400 change in price with a 3% change in consumption, if thats not inelastic I dont know what is.
(I know the numbers are exagerated but you get my point)

[Francisco Montana]

War is coming...

You kind of feel it in the air on on the headlines.

Im really not that pessimistic. But a lot of curious things have been going on and as a fan of history they, indeed, have an eery pattern to them.

With that said, I would have to see this particular story confirmed along with Manstein.

[Mithie]

Oh well. Won't see me shed a tear.

[Saturn]

Wow, I wonder now...

[danzig]

Well I say good for the Saudis...probably first time Ill ever say that. It wont allow oil to be used a political tool by tools like Chavez and Putin.

[Erik]

It wont allow oil to be used a political tool by tools like Chavez and Putin.

No, instead they are using oil as a political tool of their own.

[danzig]

No, instead they are using oil as a political tool of their own.

Quite possible as well but even still it atleast breaks it up doesnt it? Besides as I said Saudis have generally been consistent with their oil policy, a moderate line.

[Erik]

Quite possible as well but even still it atleast breaks it up doesnt it? Besides as I said Saudis have generally been consistent with their oil policy, a moderate line.

To be fair: Chavez has also been very consistent (In being a complete prick)

[Farnan]

The Saudis are smart. They know that if they increase prices too much it will decrease the demand and then all that oil will be worthless.

[magpie]

Excellent news,Given the worlds economic climate, a very smart move by Saudi Arabia.

[danzig]

The Saudis are smart. They know that if they increase prices too much it will decrease the demand and then all that oil will be worthless.

And it reduces the added pressure of alternative energy research...someone like Chavez would end up forcing the west to write a blank check for it. Granted we should be doing this anyway since countries like Chavez's little banana republic and Russia's idiotic political games shows we cant trust energy being in the hands of such people. How amusing is it that a Russian wanna be emperor, a make believe dictator and a hardline islamic country and it is the Islamic one that is the most rational.....

This makes no sense, limiting supply is in Saudi Arabia's best interest. They will not maximize profits at prices set by the market, and as mentioned above, when OPEC agreements fall apart oil prices plumet. And as the largest supplier in the cartel, if they refuse to follow supply restrictions, none of the other countries will either.

What are they thinking?

They are thinking they will sell oil for their own self interest...think about it if Chavez plays games with his and Putin threatens political nonsense countries like Saudis go we'll sell at reasonable market demand prices and no political bs. Who is going to be the seller most others look at? The whackos using energy as a weapon or the just buy our stuff guy? The one thing saudis have been consistent about is they want market stability, not skyrocketing and bottom failing prices.

[JP226]

None of the members are going to honor the production cut. OPEC is the furthest thing from a cartel and has always been. The only country capable of semi enforcing a cartel is Saudia Arabia and they don't even have the market share to really do that. BAck in the eighties during the last oil spike, Saudi Arabia actually tried to keep the price of oil at around 16 bucks a barrel. The other memebrs went behind the back of the Sauds and kept selling it cheaper so to offset that the Sauds would shore up their own production. And this went on until eventually the Sauds couldn't afford it anymore and flooded the market damn near bankrupting many of the Oil countries. AS a consequence of these high prices for so long, prices went up locally and economies deindustrialized so when the revenue shortage hit, prices were up and these economies had nothing to sell on the world market but cheap oil that couldn't pay the bills. A fairly heavy duty depression hit the region and in part played a role for the first Iraq War.

Same thing is happening now, they've been flooded with revenue and have absolutely nothing other then oil to offer the world market. They've been trying to industrialize there economies, they've been using ISI strategies like the tiger economies in asia did but with so much oil it's difficult to do. On top of that demand is falling fairly rapidly. China and India have cut subsidies to gas, people are more efficient and we've made inroads or atleast threats with alternatives. The Mideast can't keep the price of oil high because it'll kill the market in the long run and they can't keep the price high in the shortrun because they just aren't making any money. THey have to go after the market demand.

[JP226]

This makes no sense, limiting supply is in Saudi Arabia's best interest. They will not maximize profits at prices set by the market. And as the largest supplier in the cartel, if they refuse to follow supply restrictions, none of the other countries will either.

read above

[jankren]

Good, if OPEC is dissolved then Indonesian can start using our oil for our own selves.

[Hounf of Culan]

Hooray, evil Capitalist Western pigs are now one step close to dominating the world with their vicious economic policies. Im glad that Saudi Arabia realized they can't live without our money just as much as we can't live without their oil. This is reassuring to know that ultimately the consumer does control the market.