Oh no! Oil prices are too low!

ABUJA (Rheuters) – Oil prices are very low, harming investment in the industry and something must be done to steady the market, OPEC President Edmund Daukoru said on Tuesday.

That’s right folks. Now that oil prices have hit a “low” of $60, OPEC is starting to worry. Still optimistic gas prices will fall below 90c/L? (~$2/USG)… don’t bother. High prices are here to stay.

What’s really startling about this statement from the OPEC President is that, last year in March, when oil hit $50 for the very first time, many OPEC members were throwing up their arms in desperation and saying “OPEC has done all it can do.

So now after topping out at nearly $75/barrel… we’ve come back down to $60 and OPEC is freaking out?

Hmm… I smell something…

So why would they say this. Well, a number of reasons.

  1. The higher price of crude has made “unconventional” crude profitable to extract… like Tar Sands, or Deep Water rigs… as well as advanced extraction methods like water and/or gas injection. Many OPEC countries are relying on these kinds of resources to offset the decline in their conventional “easy” oil wells. A drop in prices down to, say, $30 could conceivably bankrupt projects that are just now getting off the ground.
  2. Barring investment in new projects, the high price of crude means ALOT of money for the governments controlling OPEC reserves. Money makes people happy… especially people who already have far too much of it and enjoy spending it on themselves

But why then, would they have said last year that they were tapped out? That they just couldn’t pump any faster to moderate oil prices? Well, there is truth to that as well. Oil derricks and wells can only pump so fast and that rate is well known in the industry. It was clear that in fact OPEC really *did* reach its’ limit last year… a shortage of floating oil rigs around the world and unprecedented volatility in the world due to weather, and war meant prices rose far faster than OPEC could raise production accordingly.

Moving forward, clearly prices will stay above $60. OPEC does still have that effect. If prices don’t stay where OPEC “wants” them, then that would truly be an unprecedented event as it would signal the end of OPEC as master-lever-puller. I don’t think we’re there yet.

The question then is how far up will prices go? If OPEC can’t raise production over 30mb/d and world demand keeps rising, where exactly is that oil going to come from?

High oil and gas prices are here to stay… maybe it’s time we thought about how to decouple our financial destiny to a group of power-hungry oil producers. Better yet, maybe it’s time we thought about how to decouple our economy from oil.

One reply on “Oh no! Oil prices are too low!”

  1. Prices are low because the oil people want people to think life is good and so that they will re-elect a Republican controlled House of Representatives (bit of a misnomer there, possibly, unless you count representing large corporate interests) and Senate (didn’t Mingus write a tune called “Good-Bye, Pork Barrel Hat”?) When Cheney sat down behind closed doors in the early part of 2001 with the oil and coal folks to set up energy policy, you can bet that there was a good deal of quid-pro-quoing going on.

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