Ferdinand E. Banks

OPEC and Production Cuts: Why Now's the Time to Buy

Interesting paper, even though I am tempted to reach for my 'leading academic energy economist in the world' hat. I know of nothing in the production behavior of any OPEC producer to believe that if the price of oil fell below 60 or 50 or 40 dollars, production would have to be reduced because - according to you - price would be below marginal cost.

What about speculation rather than fundamentals taking the price of oil to $147/b? There is undoubtedly a speculative component in that price, and I'm prepared to accept about 10%, but if you study rates rather than levels, then it's quite obvious that consumption was outrunning production. That is the bottom line regardless of what speculators do or don't do! As for Saudi Arabia's future plans, it's the living truth that they don't intend to produce more than 12.5mb/d, regardless of how much oil they have or don't have in the ground. Why should they? The forecasts of the IEA indicate something else, but they don't really understand very much, do they.

As for Nigeria and Angola leaving OPEC, that's certainly not impossible, although I won't say why. Oil is funny though, because to my way of thinking the Norwegians should have cut production at one time in order to keep the oil price from tanking. Why didn't they? The same reason that Norway bought new military aircraft in the US rather than Sweden, which is that they wanted to be wined and dined and shown some respect by movers and shakers in the US. Put another way, stupidity was behind that decision. As for Russia, they understand the advantages of a high oil price, and I wouldn't be surprised if they didn't move to help support the price.

Anyway, this is a paper that deserves to be carefully examined.