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Thursday, September 11, 2008 8:24 PM

OPEC Died Decades Ago

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Inquiring minds are considering an article entitled The Death Of OPEC.

Saudi Arabia walked out on OPEC yesterday. It said it would not honor the cartel's production cut. It was tired of rants from Hugo Chavez of Venezuela and the well-dressed oil minister from Iran.

As the world's largest crude exporter, the kingdom in the desert took its ball and went home.

As the Saudis left the building the message was shockingly clear. According to The New York Times, “Saudi Arabia will meet the market’s demand,” a senior OPEC delegate said. “We will see what the market requires and we will not leave a customer without oil."

The downward pressure on oil got a second hand. Brazil has confirmed another huge oil deposit to add to one it discovered off-shore earlier this year. The first field uncovered by Petrobras has the promise of being one of the largest in the world. That breadth of that deposit has now expanded.

OPEC needs that Saudis to have any credibility in terms of pricing, supply, and the ongoing success of its bully pulpit. By failing to keep its most critical member it forfeits its leverage.

OPEC has made no announcement to the effect that it is dissolving, but the process is already over.

Douglas A. McIntyre
The article to which Douglas McIntyre is referring is called Saudis Vow to Ignore OPEC Decision to Cut Production.

I hate to break the news to Douglas McIntyre (and others who think similarly) but the simple fact of the matter is OPEC Died Decades Ago, the very day it was born.

In general terms, cartels always fail. Saudi Arabia and for that matter every country in OPEC will do (and more importantly have done) what is in their own country's best interest. The bottom line is that every nation in the so-called "cartel" has cheated on so-called "quotas".

The reason is simple. If every nation honors the quota except one, the one, whoever it is can make a boatload of money over market price simply by not honoring the quota. The temptation to cheat is enormous.

In practice, they all want to be the "one", so they all have a tendency to cheat. If by some amazing feat they manage not to cheat (it happened once decades ago) the price soars, demand falls off an prices quickly crash.

There is no cartel now, but there never really was one to begin with! It has been that way for decades. It's all an illusion. This announcement will not affect the price of oil one bit, either way, over the long haul.

By the way, all manipulation schemes fail for similar reasons.

Mike "Mish" Shedlock
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