Thursday, June 03, 2004

Out of Control

News item:

OPEC Agrees to Raise Oil Output Ceiling

I've been thinking about this for the past few days. OPEC is usually pretty good about matching supply with demand to keep prices propped up. However, several news stories have surfaced from the trading floor over the past few days that lead me to believe what's happening with oil prices is kind of out of OPEC's control right now.

The first problem is one of production. Only Saudi Arabia and UAE actually have any excess capacity to work with - and both have already been cheating on production quotas. Venezuela has some excess capacity as well, however, the Venezuelan oil industry is in a state of disarray right now. So other than sending a signal to the markets that OPEC is "concerned" (insert a Bill Cosby "riiiiiiigggght" here) about price levels, I don't see much practical impact at the pump of OPEC raising production output.

The second problem is kind of embedded in the first. From my understanding of the situation, what's happening with prices in the oil markets right now is pretty much out of OPEC's direct control. So, whatever anyone thinks about Bob Woodward's assertation in his book that Saudi Prince Bandar promised Dubya that Saudi Arabia will lower oil prices in the months before the election, what's happening today is totally unrelated, IMO.

In a market such as this, it would seem that the only way to reduce oil prices is to reduce consumption. This happens in two ways: conservation (forced or voluntary), or natural demand drop (recession). The tail kind of wags the dog with the latter - a recession related to high oil costs forces a demand drop. Seems to me as if that's the direction we're probably heading. The only question remaining -- is it labeled a "Bush Recession" or a "Kerry Recession"? If economic growth numbers flatten in the next month or two, President Kerry will be immune.

So, here's what's really confusing me. Should I be happy about where gas prices are now (assuming they're going to keep going up, up, up), or should I be scared that I won't be able to afford enough gas for my lawnmower in a month or two?