Background: Oil is at about $100 per barrel right now. OPEC met this past week to decide whether they would increase production quotas, leave them unchanged, or reduce quotas. OPEC was in gridlock and adjourned without a decision to change production quotas; thus, as a result quotas will remain unchanged. However, Saudi Arabia announced a few days after the meeting that it will be increasing it's own production, in defiance of OPEC. Saudi Arabia Follows Through on Threat to Pump More Oil - International Business Times
OPEC has always had problems with cheating. If it were to fall apart completely that would be great news for the united states. I was suprised that they did not raise quotas at the last meeting, as a monopolist would like lower prices so the the junkies, er I mean oil users, like the united states and china did not have incentives to switch away. As such this Saudi news isn't really that good as it moves OPEC back to cheating to produce the proper quanitity for the monopolist. We should never forget the oil blackmail cuts in production of the 1970s, and remember OPEC is still functional enough for repeating that blackmail.
The problem with raising production is that there was already an excess supply, which means the current prices were not anchored in market reality. I suppose an OPEC news story could have dropped prices just because, but it wouldn't be from the additional supply. Tom
Excess supply when it goes into stocks of oil lowers prices even with the speculation. Opec producing more oil in excess of demand would reduce supply and price of non-opec oil. OPEC raising targets would have reduced speculation. IMHO opec's target price should be around $90. Saudi's "cheating" is a defacto raise of OPECs supply so the price has dropped to $97 edging towards that saudi-price target. "cheating" is not as clear of a signal to markets as opec raising production targets though which would have moved the price more. When opec restricts supply, other oil has come on line and initially raised prices until a new equilibrium is set.
T Boone Pickens commented on TV Kudlow report last week (use caution re: my memory here) said that 10 million bbls was Saudi practical max and it will be interesting to see if they can hold it. Pickens predicted $120 oil at year end, but only if economy looks OK. Lower oil price if economy weak, but I guess Pickens thinks economy OK, so its $120 for his 2011YE prediction.
Gas prices always go up around here in the Summer due to the cost of oxygenating the fuel. Sure, I believe that. It's like that whipped pudding stuff. Pump air into it and then charge more for less fuel. Awesome.
