OPEC: Fat and Myopic Too

It’s going to be a cold winter in much of the United States, and a costly one. The OPEC countries, which control 60% of the world’s oil exports, have ruled out any further production increases for now, all but guaranteeing that heating oil supplies will remain tight and prices will stay high. The decision undercuts OPEC’s earlier agreement on an automatic mechanism that was to boost oil output if prices exceeded $28 a barrel for more than 28 days. Prices have been in the $32-to-$34 range for some time, but OPEC oil ministers have now concluded the world can afford that. Past judgments along those lines helped bring on global recession and a sharp drop in OPEC’s sales.

So far this year OPEC has approved production boosts totaling 3.7 million barrels a day. It blames continuing high prices on low oil stocks held by U.S. refiners and shipping bottlenecks. Those factors do contribute to the problem, but contributing most of all is the rising demand for fuel fed by the growing popularity of fuel-inefficient vehicles and an economy operating at close to full capacity.

The fact remains, as the Paris-based International Energy Agency has warned, that low inventories of heating fuel in the United States and Europe raise serious risks of winter shortages, with accompanying higher prices. OPEC members, specifically Saudi Arabia, which is in the best position to significantly increase its oil production, could alleviate that threat but have decided they won’t.

OPEC ministers say they fear that raising oil supplies could produce a glut in the first half of next year that might just push prices down to near $10 a barrel. It was to avoid such wild price swings that OPEC agreed to a supposedly automatic mechanism to raise output if prices went above $28 a barrel or to lower output if prices fell below $22. That, consumers and producers alike agreed, was a reasonable and sustainable price range for all concerned. But now OPEC has grown comfortable, and of course wealthier, with oil at $30 and above.

What’s clear is that both consumers and producers are ignoring the lessons of the past. Complacency about energy conservation has boosted demand and left the United States more reliant on foreign oil than ever before. That is an unhealthy dependency, and it is exacting a stiff price. OPEC, meanwhile, seems to have forgotten that keeping oil prices high is a powerful incentive for consuming countries to invest in alternative energy sources, something that’s not in the cartel’s long-term interest. Oil in the mid-$20 range makes for a stable global economy. But that goal is being spurned, and ultimately everyone is likely to suffer.