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Wednesday, October 27, 2004

OPEC asks U.S. to tap reserve

International Herald Tribune:

The Organization of Petroleum Exporting Countries has called on the United States to dip into its strategic petroleum reserve to help deflate oil prices, the cartel's president said Wednesday. "We had communication with them," OPEC's president, Purnomo Yusgiantoro, told reporters, referring to U.S. policy makers. "I asked them to use their reserves." Purnomo, who is also Indonesia's oil minister, did not describe Washington's response.
I am against tapping the reserve just because the price was high. The strategic petroleum reserve is there for strategic reasons. If there is a serious disruption in the supply of oil (not likely, but possible) we will need it. Further, unless you have good reason to expect that the price of oil will drop soon using this supply would only temporarily relieve the situation, and refilling it would likely cost more in the future. Now, if you did know for sure that the price was going to drop, perhaps tapping the reserve would make sense (buy low, sell high). I am not sure I want our Government involved in futures speculation in this way though.


Blogger Cubicle said...

"I want our Government involved in futures speculation in this way though"

sure, then they can tell the drug compaines what price to sell the goverment drugs at, then the goverment can sell it at a higher price making a small profit.

10/27/2004 02:29:00 PM  
Blogger Aric said...

Actually, it is unlikely for the price of oil to drop in the near future and OPEC has a very good (if selfish) reason to ask the U.S. to tap the reserve.

Let's go through the places where the world gets the majority of it's oil, and look at the problems.

Saudi Arabia and the Middle East- People are still blowing things up over there. Targets include oil refining and distribution facilities. Iraq is having to pump oil back into the ground because they can't move it anywhere. Saudi Arabia supplies about 18% of our oil.

Venezuela- Oil production still isn't back up to pre-strike levels. The oil companies there lost a lot of good people, and as a result, the industry is having trouble recovering. Also, the problem that caused the strike has not gone away. President Chavez recently survived a recall election, but the opposition may not accept that. Not only that, but a series of laws introduced in 2002 (including the Hydrocarbon Law) give a greater take of oil profits to the government, further retarding recovery.

The North Sea- Providing only slightly less oil than Venezuela, the North Sea is the next trouble spot. Norwegian transportation workers are threatening to strike, cutting off the 3 mbpd supply of North Sea oil. Although ordered back to work recently, their date for general pissiness is set for November 8, so we'll have to see what happens.

Russia- YUKOS still owes the Russian government about 7 billion dollars in back taxes. As YUKOS fails to make their payments, the Russian government periodically seizes their assets. YUKOS is producing oil, they just can't afford to ship it anywhere. As YUKOS is the number 1 producer of oil in Russia, which is the 2nd largest producer of oil (after Saudi Arabia, the U.S. is third), and most of that oil goes to the growing markets of India and China (which together account for 40% of the projected growth in world demand), this is a problem.

Sudan- Under U.S. sanction since 1997, Sudan's burgeoning oil industry is under threat of worldwide sanction. Although the 500,000 barrels they are expected to produce in 2005 is small compared to other producing countries, it's another brick in the wall.

Nigeria- Although things seem to be improving in 2003 and 2004 in Nigeria, the area is still "fragile." We get 7.5% of our oil from Nigeria, and domestic unrest there in August 2003 helped cause the price spike of the same period.

To sum up, I don't think world crude prices are going down significantly in the next couple of years. They may go down, but I suspect we'll be paying $40+ per barrel of oil and $1.75+ per gallon of gas for a long time to come.

As to why OPEC wants us to tap the preserve? Look what happened last time. There was a decisive drop in gasoline prices all out of proportion to the amount of crude released. This is a good thing as far as OPEC is concerned, because it stabilized the stock market, and helped kick the economy up. Most OPEC foreign investments are in the United States. When our markets take a hit, they lose lots of money. There are entire departments of people employed by OPEC whose sole job in life is to determine the perfect balance of oil price vs. U.S. economic growth.

Sorry for the long comment.

-- Aric

10/27/2004 03:41:00 PM  
Blogger Aric said...

Whoops. Thought you said "you believed" the price of oil would drop soon. Please excuse my mis-targeted splurge of wordage.

-- Aric

10/27/2004 03:44:00 PM  
Blogger Dave Justus said...

No problem Aric. Very good info.

To the items you listed I would add Iran, which could face sanctions or an attack (by us or Israel)

Most experts think there is about a $10 instability premium on the price of oil, but this premium could be around for a while.

10/27/2004 03:57:00 PM  
Blogger Cubicle said...

Of couse i would like to point out that keeping the price low actually keeps compeitors out of the market (alternative fuels, and other oil drillers and refinaries).

So of couse opec would want the price low, they could lose market dominace if anyone could drill oil and make money.

10/28/2004 01:20:00 PM  

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