The Implications of OPEC's Failed Meeting

Includes: OIL
by: Karl Denninger

For 30 years Saudi Arabia was able to do two things:

  • Have their Kings and Princes sucked up to by successive administrations in the United States.
  • In return, control the amount and thus price of oil on the world market.

That ended today.

The implications of this were a short term immediate spike in the price of oil, as a lot of people were short and expecting Saudi Arabia to announce (after twisting everyone's arm) that production would go up.

(Click to enlarge)

But this short-term reaction, while important, isn't the big problem. The big problem is that OPEC has been neutered, and the U.S. government's effective back door control over OPEC's production via bribery with the Saudi Royal Family has, at least temporarily, ended.

Cartel behavior is, over the long term, inherently unstable. The reason for this is the fact that eventually someone finds a good business reason to defect from the cartel and by doing so gains a competitive advantage. It is thus only with some sort of enforcement mechanism that cartel behavior can be maintained for any length of time. We did it with 30 years of support for Saudi Arabia, officially and otherwise.

Today, that hegemony and control has been cracked. Exactly how badly that crack propagates, and whether it turns into an outright rupture remains to be seen. But this much is certain: The world as it existed in the oil markets up until this morning is different now than it was a few hours ago.

It will be a while before we discern whether this will lead to higher or lower world oil prices. There['s a solid argument for both directions, with the peak oilers claiming that Saudi and others can't increase production while the free market folks will of course look at freedom of individual action as leading to lower prices. You could give me either position to argue in a debate and I could easily do it.

But this much is certain: The world is changing, and our control over the actions of OPEC via Saudi Arabia is waning, if it hasn't completely collapsed this morning. And if the latter is the case the implications go far beyond the price of a barrel of oil, as Saudi Arabia is a brutally repressive nation that has utterly depended on the United States for much of its technology and political stability.

A storm is coming my friends ... and it's a bad one.