Is OPEC Killing Itself? 30 comments
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With oil prices sitting at more than 109 dollars a barrel, near the all-time high, you have to think that the title of this article makes me absolutely crazy. In fact, you're right. Billions of dollars are flowing from the West and Asia to the Organization of Petroleum Exporting Nations (OPEC). In 2008 the Energy Information Administration (EIA) predicts that OPEC revenue will hit $927 billion, up 37 percent from 2007. Also, in 2007 profits were also higher than 2006, with Saudi Arabia coming out as the biggest winner earning a cool $124 billion. (In case you're wondering, with about 7,000 member of the Saudi royal family, the House of Saud, they each could buy about 45,000 Ferraris.)
With this kind of success it's hard to argue that OPEC's future will be anything but bright, but that's exactly what I'm going to do.
Crisis Spurs Innovation
If one thing can be learned from history, it is that crisis spurs innovation: WWI brought us the United Nations, out of the Great Depression came the FDIC, SEC, Social Security and many other forms of government regulation, and the splitting of the atom was a result of the daunting threat of the German military in the Second World War. Those are just examples of government action and don't even touch on the countless other innovations created through our market-based economic system.
Markets facilitate creativity as competition grows and entire industries are affected by the delicate balance between supply and demand. In no part of our lives could this be truer today than with oil and gas. Consumers in the United States and all over the world are feeling the increasing pressure of rising fuel prices. It is this pressure that threatens the livelihood of the world's biggest oil exporters in the long run. Higher oil prices have created a modern crisis for the American economy. If history is a guide, our market system may facilitate a solution that leads us away from oil, rendering the OPEC cartel obsolete.
Why is this time different?
The United States has seen lofty oil prices in the past, but those higher prices have not translated to a decrease in America's dependence on oil. What makes this time different? To answer this question, we must first determine the cause of price increases today compared to the past.
High demand is blamed for the majority of the recent run-up in oil prices, while the previous oil spikes in the 1970s were politically motivated. These politically generated embargoes were not sustainable as the lure of higher profits broke the will of the cartel.
Today, future demand for oil is expected to increase as nations all over the world continue to develop. This increasing demand creates a long-term persistence in the price levels not seen in the past. Also, this persistence forces firms and other economic agents to further incorporate higher prices into their long-run expectations.
These expectations make this oil "crisis" different than anything we've seen in the past: Firms are anticipating long high oil prices.
Recall from your intro to macroeconomics class that in the short term some inputs are fixed, but in the long run all inputs are variable. Today, the majority of capital machinery depends on oil or gas as fuel. Over a long enough time horizon, that could all change. If oil prices continue to increase or remain at these elevated levels, it becomes economically viable for firms to pursue alternatives to oil and invest in other technologies. In a sense, as oil prices continue to rise, the black gold will face more and more competition and, as all investors know, competition destroys profits.
With OPEC reluctant to take action to alleviate current price pressures, it is making a big bet against the market system with their future on the line. The current oil crisis may cause consumers pain in the short run, but may be the catalyst the market needs to innovate in the long run.
Disclosure: Author has no positions.
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joking...
Yucca mountain can handle the spent nuclear fuel, while plasma burners can dispose of the batteries.
I think this is a great article that left the subject a little dry, but no biggy. The innovation is there to make you ponder. I just hope out of this innovation, there is a solution for the truckers to go hybrid? Those of us that like to go camping with our trailers, a truck that can pull it that has the power yet of the hybrid nature?
This is America, we are for the most part very intelligent and somewhat college educated. The solution is there, just have to get the oil/money mongers out of the way so the technology can flurish.
Rant off!
WWI brought the League of Nations not the UN
Do you think OPEC can open a valve and release a flood of oil. The easy oil is running out. Actually its still cheap which is why there are no electric cars already. You can drive a monster vehicle weighing over 2000 pounds across town for a dollar, crazy cheap. Its only a crisis now for the poor countries. OPEC is developing prospects but there is no vast untapped fields like Ghawar.
Perhaps, the greedy and narrow-minded oil companies and global auto industry, in cooperation with their cohorts in government--I am not a conspiracy theorist--who have worked so hard over the past 60+ years to stifle innovation in the auto industry and alternative energy sector will finally come to their senses when they realize that their greed may result in their downfall. I won't hold my breath.
Also in Canada Sackatchewan but Its in oil sands there is a company that has discovered another Huge oil find. they are looking at between 250-500 billion barrels of oil. If this is true I think as more and more wells are drilled the cost of oil could come down somewhat if they build more refineries.
in a few years (5-8) and all these big finds in us is very hard to get at and in rock or sand, still not profitable to extract at
current prices. Has to be something with atomic batteries.
Get a apartment in Bangkok for 300.00 month use the
electric sky train for 30 cents to 2.20 for 30 miles, subway,
river big taxi boats 18 baht (30 cents) for 30 miles, for get the cars, cheap buses to ocean 3.00 -5.00 much simpler.
Wehave very bad system, use trains not trucks to move
freight. NO infracture, we are lazy just spoiled.
Hotels 9.00 up .
Any massive constuction projects undertaken in the US will be postponed until its too late...EPA constraints...the eco-geeks will have a field day, the liberal press will have a field day.
The only way to even attempt internal expansion into the coal/oil sands arena will be a crisis involved situation...Energy supply has to be deemed a National Security issue...States Rights?...There won't be any. EPA disbanded. Not in my backyard?...try Emminant Domain....Either bite the bullet or let the bullet bite you...
But regardless of how you hack it, these are all long term projects...benefits won't be felt until long after $200 oil....electric cars, hydrogen, hybrids...Whats the cost of just replacing Cars.......say 300 million of them...hmmm...how about 20%...60 million...all of the replacements will cost more but lets just use $20,000...6 0's there and another 3 0's there...
How about 1.2 TRILLION, maybe its easier to look at it as 1200 Billion......for just 20%...Trucks are not included...The needed changes should have started 30 years ago, because regardless of the technology selected, the infrastructure to accommodate it has to be in place first...the infrastructure is going to be 1000% more than it would have been 30 years ago when stockpiles of everything were available.
Those not taken away up by then will be promptly discarded.
'Problem is we lost and won't be picked up!!'
These plug-in hybrids are only about 1-2 years out and we can start then. You can use conversion kits now. We would still use oil, but that could give our use of it a quick 40% hair cut making the cost less relevant while driving the cost down at the same time.
win-win-win-win-win-wi... Easy, cheap solution, no meaningful downside.
With their petrodollar they can buy out a lot of businesses throughout the world to continue their world dominance financially and secure their futures once their oil drys out .
I would like to think that politics drove this, but the inverse assumes less coincidences. We set a new world order in the early 70's to reflect our peak and another one is being set now to reflect the world peak.
With oil shale economically feasible only at much higher oil prices and battery technology preventing a widespread electric car solution I am still long oil.