Not Your Father's OPEC

For years, OPEC (The Organization of Petroleum Exporting Countries) was a cartel that was a lot more like a bunch of wild horses than a unified and cohesive force to control oil pricing in the world. In the past, the OPEC cartel would agree among themselves to restrict oil production in their respective countries and, as a result of being a collective force, then could drive prices up. But, also in the past, "greed" would take over and an individual country or countries within OPEC would begin to "cheat" on their agreed upon quotas. In doing so, those cheaters would take advantage of the artificially high oil prices to get more revenues in their own coffers than they would have if they had stuck to their individual quota. When a country or countries started to cheat, the price of oil would start to fall; and, then, they would "all" begin to cheat. The high price of oil would then collapse. Because of constant cheating, OPEC just couldn't keep oil prices consistently high. That was your father's OPEC.

In the last three to four years, OPEC has changed. They have stopped cheating. As a result, they have been able to drive oil prices higher and higher. They have done this by carefully controlling the supply of oil in order to maintain a level that is approximately 1% to 2% above the level of worldwide demand. This, then, creates a constraint on the world's oil supply that is constantly teetering on the edge of a worldwide shortage. In turn, oil traders are compelled to buy oil futures based on limited supply and rising prices; and, in the artificial belief that there might a major supply disruption that will cause a massive spike in oil prices that would make them all very rich.

Making things worse, oil is a non-perishable commodity. It can be stored for years and then sold at even higher prices in the future. Because oil prices are rising so rapidly and so consistently, it has been financially advantageous to store oil and keep it off the market because the cost to store it is so small in comparison to the potential for future profits. This is a form of hoarding and it, too, has contributed to artificial levels of demand for oil in the world. As anyone knows who has taken economics, high demand and limited supply are two conditions in the "Law of Supply and Demand" that contribute to high prices. With oil, we have both.

Over the weekend, the rebels in Nigeria attacked and disrupted a major oil pipeline in that country. (Note: Nigeria is the fourth largest supplier of oil to this country) Prior to this, oil prices had been falling from a previous high near $120 a barrel. But, this act alone drove prices back to new highs because oil traders saw this as another event that could cause a massive shortage in the worldwide availability of oil; driving prices through the roof. But, this event, like some many others the past, won't actually create a worldwide supply shortage because OPEC has its hands on the spigot. It will easily adjust the "supply" to maintain that artificial 1-2 percent supply level above demand. You know this is true because not once in the last four years has there ever been a lack of oil in the world due to a major supply disruption. There have never been long lines at the gas station. It didn't happen when hundreds of oil platforms were shut down in the Gulf of Mexico during the Katrina and Rita hurricanes. It didn't happen when Iraq's oil was almost completely taken off line due to Al Qaeda attacks.

OPEC doesn't want an "abrupt" worldwide supply shortage because they don't want to be seen as the true bad guys that they really are. Instead, they are quite happy with the ever increasing price for oil. This allows the world to somewhat adjust to higher prices without creating a situation where OPEC countries could actually wind up being a target of the world's anger and could actually be the target of an attack; like in a war. Also, an abrupt shortage could force countries like the United States to take immediate and drastic actions that could result in alternatives to OPEC oil; whether it be increased internal production or the implementation of oil alternatives.

OPEC has finally gotten itself together as a true cartel. They are in the catbird seat and they know it. They have us by the throats because they control most of the world's oil. Sadly, there is nothing we can do about it unless we increase our own production. We aren't going to conserve ourselves out of this problem because OPEC will just adjust the flow of oil downwards to compensate; keeping prices high. This is not the OPEC we have dealt with in the past. It's not your father's OPEC!