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OPEC'S New Challenge

Oil prices move faster than consumers can adapt to them. But once consuming nations change gears, it's hard for oil producers to stop the crumbling of the oil market.

The summer's high oil prices got consumption rolling downhill in the United States. And consumption is still falling steeply here even as prices ease. Many people forget that after the 1979 oil price shock, U.S. consumption fell about 20 percent over four years. Meanwhile in China, the great engine of growing oil consumption, the use of petroleum products has looked surprisingly tepid. That is a result of the ailing world economy's falling demand for Chinese exports and a result of higher domestic prices and lower subsidies - retail gasoline and diesel prices in China are now higher than those in the United States.

The credit crisis has made things worse. A cargo of oil is a very expensive item and buyers have to put money up front. Even before the Organization of the Petroleum Exporting Countries met this morning, some customers were having trouble lining up letters of credit and were not buying all the crude oil available to them, sources said.

So the 1.5 million barrel a day cut in OPEC output announced today didn't convince oil traders that the cartel had done enough to stop the slide in oil prices. On the New York Mercantile Exchange, oil prices slid another 5 percent to less than $65 a barrel.

Roger Diwan, a partner in PFC Energy, a Washington-based consulting firm, said that OPEC "can't do much for prices right now. It has nothing to do with them. It has everything to do with deleveraging and the flight to the dollar for safety. It's about the bigger macro picture."

But he said "this is a serious cut" and even if all the OPEC members don't comply with their new quotas, he estimated that at least one million barrels a day would be taken off the market. In the meantime, demand would rise for heating oil over the winter and, Diwan added, OPEC could always make deeper cuts in the early part of next year. That is the approach the cartel used in late 2006 and early 2007 when it stopped a fall in prices then.

This time it will be harder because of the world financial crisis. OPEC is looking to the Asian financial crisis of 1997 for guidance about what not to do. At the time, the group pledged to keep production high and ease financial burdens on hard-pressed nations - and oil prices collapsed. So this time, there was no debate over whether to cut oil production, only a relatively tame negotiation over how much to cut oil production. The meeting today in Vienna lasted only an hour or so.

From the point of view of consuming countries, however, the last thing the ailing world economy needs is for OPEC to succeed in boosting oil prices, or maybe even stabilizing them. "This decline in oil prices couldn't have come at a better time for consumers," said Larry Goldstein, trustee with the Energy Policy Research Foundation. He compared it to a stimulus package of more than $250 billion for U.S. consumers and of close to $750 billion for consumers worldwide. In his view, OPEC's decision to cut output now was "a totally insensitive move on their part."

But you can't use sensitivity to pay for domestic subsidies, finance big construction projects, run up big surplus cash reserves or bail out domestic banks and currencies. That probably weighed heavier on the minds of the oil exporters than Americans' feelings, or finances.

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Comments (12)

dummy4peace Author Profile Page:

It's like playing with fire. Greed had backfired.
When the threshold is reached, it will take much more time to recover from this oil bubble burst.

shipfreakbo214 Author Profile Page:

Maybe now we can put a stop to these bonus checks for CEO's. EXECUTIVE WELFARE.

shipfreakbo214 Author Profile Page:

Strange,six months back any one tied to the oil business was living the high life,could care less how many of our citizens suffered.Now we have a few of our oil corporation crying, there telling us they won't spend to much money on oil exploration if the problem doesn't change.
Let's get the crying towels out for OPEC and our oil corporations, poor poverty stricken people.

chaz31 Author Profile Page:

so much for the oil shortage. This is beyond comical, it is a disgrace

dgh27 Author Profile Page:

Concerning the human population time bomb, I fully expect a die off of humans during the present century.

The ravages of burgeoning air and water pollution, as well as food shortages and the nuclear exchanges rivalry for diminishing resources may prompt, will generate a cataclysmic population reduction.

Humans are out of control. They are destroying the small blue planet that gave them life. Some of them have to go.

No pleasant scenario, perhaps, but this is what I see ahead.

dmathew1 Author Profile Page:

All this talk of the oil bubble popping is just silly ...

Yes, the oil bubble popped ... but the global economy also popped. Back when oil was $147 a barrel and gold was $1000 an ounce, the Dow was above 12,000.

Now oil is plunging and it will keep plunging, gold is $700 an ounce, and the Dow is at 8300 and plunging.

Gasoline might go down to $2 a gallon but that is only because millions of Americans who formerly commuted to their jobs in their SUVs won't have a job any longer.

Nor should anyone imagine that the Peak Oil problem is averted. No capital and cheap oil will render a lot of oil projects unprofitable and/or impossible. As the world's ability to consume oil declines the world's ability to produce oil will also decline.

But there is a much more serious problem facing humankind in the 21st century. The human population has passed 6.7 billion on the way to 9 billion. This is the ...

Human Population Bubble

... and it is going to pop. After the human population has peaked expect the population to decline just as seriously as housing and oil prices declined after their own bubbles popped.

What happens on a planet with 9 billion people when there is only enough food for 8 billion? Wait and see.

http://www.flickr.com/dmathew1

akpat Author Profile Page:

It's time to remove oil and several other commodities from the futures market all together. This present economic disaster has been created by the $145 / barrel oil. Our whole economy is based on oil so if it goes up then it takes money from other things.

I know my own cost of gas has doubled in the last 8 years and food has gone up accordingly. some part of this is due to the price of diesel used to move freight and drive our farming industry but theres also speculation in it as well. How about $2.00 for a single red pepper.

Trickle down economics doesn't work, when the little guy can get a decent job, pay his expenses and have some money left over the economy will rise. Until then forget it.

dgh27 Author Profile Page:

Can anyone explain to me why I should identify with hand-wringing crude oil traders, shareholders, and analysts who are crying about sliding crude oil prices?

Like millions of other Americans, I subsist on a limited but fixed retirement income. That income is in no way linked to the vagaries of Wall Street or any commodities exchange. There are no portfolios in my life.

Should crude oil prices continue to slide because an economic downturn has produced a glut in inventories, my gasoline may eventually cost less than the present $2.75 a gallon I am forced to pay when gassing up my old truck with as much as a $20 bill will buy.

Why should I give a damn that men and women who can afford to hold blocks of crude oil futures--or the commodity traders with whom they are in consort--are wringing their hands because they, as members of corporate capitalism's investor class, will see diminished dividends when their commodity of choice loses value?

What is that to me?

Many middle class Americans and most economically deprived ones have compromised their homes, health, lifestyles, and dignity to buy enough gasoline each week to keep a job during the past year.

Yet, when natural market forces--the law of supply and demand--suggests that gasoline prices may fall, we are subjected to endless lamentations from the investment sector about the calamity that falling crude prices represents.

Calamity for whom?

What is good for a free market capitalist is often bad for the rest of us.

But they would seek to persuade me that I simply don't understand--that what is good for them is actually good for me too.

I reject a lifetime of brainwashing by corporate capitalism's spokespersons and cheerleaders who are always peddling their trickle down horse and sparrow economic theories. As with a humble sparrow that hopes to find a few oat grains in a horse's waste, a poor person in America is expected to be ever so grateful for any little economic mite that trickles down from an investment capitalist's excesses.

I can't see that from my perspective here in Podunk.

When gasoline retreats to $2, that will be good for me by any measure. I might even be able to drive to my regional commercial center again after half a year of penury.

Again, why is that not good for me and others in my financial bracket?

Why am I unable to identify with your lamentations, investors?

jackandconnie1 Author Profile Page:

America,due to the rising cost of fuel,actually have begun to demand less,we are craving for our leaders to bring us alternatives,I've yet to hear said that Pres. Bush,8 years ago was pushing for drilling and obtaining our own resources,it possibly would be reality if only we'd listen. Iran,Vensuela and Russia have long been a thorn in America's side,as well as OPEC,now with oil prices dropping,their radical,socialist agendas are being challenged,well,come on Americans,stand back and be strong,lets demand less and less and yes let's do buy on goods made in America or better yet,make our own gifts for Christmas.Its not selfish to take care of our own.God blessed us to be in this country.He's trying to get us back to the basic nessecities of life,we need to help ourselves.Buy less and less. Go to Faith-based organizations for help.We want America back from overseas. Please,for our children and grandchildren.Money will rot, morals and charity will outlast it all! God Bless!

sangjmoon Author Profile Page:

There is concern that the drop in oil price will stagnate the push for alternative fuels. This is ok. The government should get out of the business of affecting demand for alternative fuels. The mandated quotas and subsidies for ethanol only spiraled food prices through the roof showing again why government shouldn't do things like this. What the government should be doing is only funding research and development of alternative fuels and leaving supply an demand to the market.

yeahright1 Author Profile Page:

This year it is more important than ever to make this a made in usa Christmas. Demand retailers carry Made In USA products as a matter of choice. If they won't shop the web, buy local crafts foods, or wines. Buy books or magazines if you have to buy gift certificates to local restraunts. Get our money at home.!!! Let the chinese swim in their lead paints and Iran drink their crude. Just because oil is cheaper for now doesn't mean we shouldn.t pressure our government to keep pushing for alternative fuels.. GOD BLESS AMERICA.

sangjmoon Author Profile Page:

I predicted the oil bubble popping back in April. The funny thing about OPEC cutting oil production is that it never been successful at enforcing it. Member nations pump as much oil as the market wants. Any cut in production usually is a result of market forces rather than anything OPEC has done. However, they were good at affecting the psychology aspect affecting oil prices in the 1970s. Now, the cat is pretty much out of the bag, and OPEC no longer has the impact it used to. What will be very interesting to see is how the lower oil prices affects Venezuela. Chavez has been increasing his military and welfare programs, and will oil at the price it is now, he isn' able to afford the increased recurring costs of his spending splurge let alone his attempts to spread his influence through his external spending. As for what will be the next bubble to pop, that will be the gold bubble, and after that it will be the economic armageddon as he bulk of the baby boomers retire driving government spending through the roof through Medicare/Medicaid and Social Security.

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