Will OPEC Cheat On Each Other?

This morning, oil fell below $64 a barrel. This was a drop of around $4. In September, before the true extent of all this credit mess was known, I thought we could get down to $60 a barrel when some, like T. Boone Pickens, were predicting a mere fall to $80. I knew, based on my years of experience in investing, that the $80 a barrel level would be overshot; but, not quite this fast (See my Septemeber 2nd blog entry: "Is $80 or $60 A Barrel Oil in Our Future?").

I now think that a price below $50/barrel is achievable and, contrary to my previous blog entry, I think oil prices may be held below $80 a barrel throughout 2009.

Also seeing that potential, OPEC is now in panic mode. At their emergency meeting this morning, they immediately cut oil by 1.5 million barrels a day to stabilize prices (See Full Story). The downdraft in oil is killing government revenues of state-run oil operations in countries like Saudi Arabia, Venezuela, Iran, and Russia. Take, for example, Venezuela. If you assume that Venezuela is exporting about 2.4 million barrels of oil per day, the difference in revenues when oil was at a high of $147 and the current price of $63 is one big hurt. It puts a serious dent in Chavez' plans to buy more military toys like planes, helicopters, tanks and guns.

When oil was going up, the OPEC cartel was fairly disciplined. They could see the benefits of holding the production levels to force prices up. In this down draft, however, the honor among these thieves might not be as true. OPEC has always had a history of cheating on production levels so they could sneak extra profits in for their country's coffers. My guess is that the falling oil prices will restore OPEC members to their "cheating ways". That's why I think $45 a barrel (maybe, even lower) may be achievable.

One last comment. These oil prices will, again, kick the chair out from underneath any plans for offshore drilling. Once again, it will be oil prices coming down that will set us up for another energy crisis in the future; once the world economies starts to stabilize. Once again, we will have lost another couple of years or more in drilling ourselves out of our dependence on foreign oil. That's because, sadly, our politicians will have responded to these temporary low prices as they have always done in the past, by not doing anything. Believe me, wind and solar plans by the Obama and the Democrats, won't even make a dent in those 200 million cars that we have on our city streets.