Saturday, November 29, 2008

OPEC Fiddles While Venezuela Burns

Saudi Arabia says OPEC needs to drop production until oil moves back above $75 a barrel. As the largest member in the cartel, it would seem that the kingdom would get its way.

No such luck.

"OPEC on Saturday deferred a decision on a new oil supply cut amid signs that Saudi Arabia and its Gulf allies are demanding tighter adherence to restraints agreed in the past two months," according to Reuters.

It is remarkable odd that there should be dissent within OPEC at this point. Some of the member economies are in real trouble. Venezuela and Iran are running huge national budget deficits. Hugo Chavez of Venezuela may not be able to keep a lock on his dictatorship if he cannot support a system where he can send spread money within his own nation and neighbors who have come to rely on his largess.

The math behind the OPEC trouble is simple. Cartel members make more money when crude is at $120 than when it is at $60.

OPEC could certainly raise the price of oil. It only needs to make a huge cut in production, one to bring supply below the falling international demand be eroded by a global recession.

But, if the members cannot agree on how the cut is to be made, when, and and how it is be monitored and supported, consuming nations will continue to benefit from low energy costs. That all by itself could keep the recession from growing longer and deeper than it might otherwise.

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