Despite last week's promise by OPEC to pump more crude, oil prices crested $83 a barrel Friday, setting a new [nominal] record and raising new questions about the cartel’s willingness and ability to keep the world supplied with the oil we’ve yet to find a real alternative for.
There was, first of all, the question of the size of the "increase" itself. The promised extra oil—500,000 barrels per day (bpd)—is a pittance, barely half a percent of the 85.4 million barrels used globally every 24 hours, and not even enough to cover the oil production lost recently in Mexico due to hurricanes. Add in the fact that OPEC member Abu Dhabi must soon cut output by 800,000 bpd for long-overdue oil field maintenance and it’s obvious why oil markets effectively ignored OPEC’s generosity and pushed prices up, up, up.
Less obvious, however, is why OPEC would offer such a measly boost to begin with—especially when U.S. government figures show the cartel with some 2.5 million bpd in “spare” production capacity.
Conventional explanations focus on internal rifts in OPEC, particularly between Saudi Arabia and Iran. Where the American-loving Saudis want to pump more oil, the fanatics in Tehran are said to enjoy causing the Great Satan economic pain.
We’re also told that OPEC is wracked by fear of an oil glut: oil markets are tight today, but if America’s sub-prime mortgage mess leads to recession, OPEC worries, American oil demand will fall—just as an increase in output is hitting the market, leading to oversupply and crashing prices. This was the lesson from 1997, when OPEC raised its output just as the “Asian flu” killed oil demand, with the result that oil prices tumbled to single digits—a disaster OPEC doesn’t want to repeat.
But this ten-year-old lesson doesn’t explain OPEC’s current reluctance to pump. In the first place, the risk of a major price collapse today is tiny—as OPEC well knows. American demand may be uncertain, due to our housing crisis. But there is no sign of slowing oil demand in Asia or other emerging markets, which are sucking up every barrel exporters can send them.
Second, even if America does slip into recession, analysts say that at worst, U.S. oil demand would fall by 100,000 barrels a day—less than the margin of error for Saudi daily oil production, and hardly enough to offset thirsty Asia.
Further, after years of high prices, OPEC is swimming in petro-dollars: cartel members could easily survive if prices slid back to $60 or even $55 a barrel. “There is very little risk for OPEC,” says one veteran industry analyst who is watching the oil cartel’s recalcitrance with growing exasperation. OPEC member’s combined foreign cash reserves, he says, “are bigger than all of China’s—and this for a regional economy smaller in size than the Netherlands. What can they possibly fear will happen to them if prices were to fall to a moderate level?”
So if the risk of a price collapse is so low, why won't OPEC raise production, ease prices, and behave like the “reliable” energy party it steadily claims to be? The most plausible theory may also be the simplest: greed. Wth prices high and demand still soaring, cartel members no longer feel the need to take any price risk at all. Because the big importers like the United States, Japan, Europe, and now China have no alternative suppliers, OPEC needn't assume even a tiny risk of declining prices: instead, the cartel knows it can leave markets tight, and prices high, with zero fear of losing customers. In a sense, $80 oil is a measure of OPEC’s supreme confidence that price risk is now all on the shoulders of buyers. As my analyst friend puts it, OPEC is “playing a conservative game in the most selfish way known to mankind.”
That OPEC has become greedy and complacent isn’t hard to believe: power corrupts and OPEC seems very much to be in the driver’s seat. But there is an even bleaker, and simpler, theory for OPEC’s stingy behavior: the cartel doesn’t have the extra oil to pump. U.S. government figures may show OPEC members with a combined “spare production capacity” of about 2.5 million barrels a day. But depletion experts like Matt Simmons, a sometimes-energy advisor to the Bush administration, have long claimed these figures are inflated. By Simmons' account, countries such as Saudi Arabia have already tapped most of their big oil fields and are struggling to maintain even current production levels—much less raise output.
At best, a significant increase in oil volume would take months and perhaps years to bring to the market. At worst—that is, if world oil production truly has “peaked,” as many oil pessimists now claim—even OPEC won’t be able to raise output meaningfully—bad news for a global economy that depends almost exclusively on petroleum products to move people and freight, and has made precious little progress in developing alternatives.
Oil conservatives have never accepted peak-oil theory: current pumping problems stem more from lack of investment in new fields than from any geological limits. Yet with so much money flowing to oil producers today, it's hard to see why producers wouldn't be putting some of that capital back into the ground, so to speak, if there were sufficient oil opportunities to invest in.
Peak-oil theorists argue that if OPEC still hasn't raised oil production this winter, after the first cold snap drives up demand for heating oil, it will be hard indeed to argue that OPEC is “choosing” to keep oil prices high. And even some conservative analysts, who don’t subscribe to the “peak oil” theory, nonetheless expect that oil prices will not only stay high, but could top $100 by year’s end.
Whatever the explanation—greed or depletion—today’s high prices should be a clear signal to importers like the United States that OPEC is an even less reliable “energy partner” than before—and that our timeframe for getting beyond oil—with alternative fuels or efficiency or both—just became much shorter indeed.