jgonion

Seven Ways to Play Both Oil Scenarios

This piece considers two scenarios to why OPEC as not cut production as if they are the only two possibilities: Either the OPEC states are short on cash, or they are already maxed-out on production.

Consider the fact that OPC's oil-fields were developed back in the 70's, giving OPEC the lowest cost-of-production of any oil-producing state. Far from running out of cash, this pricing power gives OPEC the ability to keep oil prices low, which will hurt other oil-producing ventures far more than it hurts OPEC. For example: Oil-sands, Shale-oil, and even domestic oil production that has yet to amortize exploration & development costs have far higher costs of production than OPEC does.

So why would they want to cut production and increase prices? Even though prices may go up, this does not balance fewer barrels of oil shipped. Raising prices by lowering production gives OPEC less revenue while also helping their competition (who have higher production costs) to be profitable.

Among other things, OPEC is a collection of savvy businessmen that understand how the oil markets work very well. Coming out of this global recession, the worse financial shape non-OPEC members are in, the better positioned OPEC will be, and they know it.

Why isn't OPEC reducing production? It's simply bad business.