OPEC’s plan to cut oil output to keep prices from falling emphasizes the urgency for the western world to get independent from the cartel

Crude oil price chart

Crude oil price chart

PDF:what-matters-crude-oil-price-chart

A global economic cooldown is more and more likely with the United States and many countries of the European Union already in or close to a recession. The global financial crisis sparked by the burst of the housing bubble in America spreads hysteria, fear and confusion around the world. Stock markets around the world have gone crazy. We saw tremendous losses and short-term record gains on stock markets in recent weeks. Many large financial institutions have collapsed or needed to be bailed out by governments with tax payer money. Fears that the deeply routed problems in the financial as well as in the private sector could bring down the whole system, prompted governments around the globe to take action. In the meantime, trillions of dollars are used to stabilize the financial system. This unprecedented government intervention has, however, not yet restored confidence. Shares plummeted, trillions of dollars in share value have been lost. Markets almost imploded during the last few weeks. Unemployment in the U.S. has risen to a relatively high level. The situation is bad and its widely expected that we haven’t seen the bottom yet.

One consequence is that energy demand from industrialized nations has fallen which reduces demand for oil decisively. Consequently, we watched the price of oil falling by more than 50% since July’s record high at $147 a barrel. Crude oil is trading close to $70 per barrel right now. Though oil is still expensive in comparison with oil prices below $16 a barrel like in the late 1990s. But the plunge in oil prices is apparently causing fear in many oil exporting countries. Especially OPEC countries have become used to extremely high revenues from oil exports and populist leaders like in Iran and Venezuela increased government spending exorbitantly. Hugo Chavez of Venezuela uses most of the country’s oil revenues to build up socialism in Venezuela. This is how he managed to be an elected and legitimatized leader. But the annoying thing for these countries is that they depend on oil prices above $80 a barrel to balance their budget. If oil prices don’t recover, Iran, Venezuela as well as Iraq could see a budget deficit. Even Saudi Arabia has an interest in keeping oil prices high, as it needs $65 a barrel to pay its bills. Some countries like Iraq already revised budget projections downward and cut spending, but other countries, especially those who are lead by populists, are afraid that less generous public spending wouldn’t go down well with the people and threaten their power. That’s why OPEC will hold an emergency meeting on Friday at its headquarters in Vienna. They’re expected to decide on considerable output cuts in order to “stabilize prices”. In other words, they can’t get enough money and they don’t care about whether their customers actually could bear the burden at the moment. In the late 1990s, the situation was similar when oil-exporting countries saw urgent need for higher prices during the price slump caused by the Asian crisis. At that point in time, oil prices were approaching the $10 line. Now, the cut in oil production should shore up prices at a level that is much higher than back in the 90s. Nevertheless, it’s not certain whether an output cut can reverse the trend in oil prices immediately. However, there can be no doubt that oil prices will soar even above $150 a gallon in the medium-term, as oil production will peak inevitably within  the next decade. Global oil reserves are limited, and most of the oil that is easily accessible has already been pumped out of the wells. Fortunately, the current crisis gives us some extra time to prepare for a transition away from oil. The more time we have to come up with alternatives, the less brutal this transition will be. But we obviously have to hurry, though, as we do not anymore want to rely on OPEC’s good will beside from the enormous amount of money that is daily transferred to the Middle East. Energy independence is vital for national security, economic stability and growth. When we start to tap into energy sources that are accessible at home using technologies that are developed at home, millions of new jobs will be created and tax revenues will remain within the borders. In addition, we can reduce our carbon dioxide emissions and combat global warming.

As reducing the power of the oil cartel and shifting to alternatives is in our and the planet’s best interest, there’s no reason to hesitate!

http://www.usatoday.com/money/industries/energy/2008-10-19-oil-opec-pressure_N.htm

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2 Comments

Filed under Economy, Environment, Global Issues, Politics

2 responses to “OPEC’s plan to cut oil output to keep prices from falling emphasizes the urgency for the western world to get independent from the cartel

  1. Pingback: on the global crisis « What Matters

  2. Pingback: Capitalism will survive: Why America will remain the #1 global superpower « What Matters

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