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OPEC and the oil crisis
Saudi King Abdullah bin Abdul Aziz al-Saud, right, talks with Emir of Kuwait Sheikh Sabah al-Ahmed al-Sabah during the closing ceremony of the OPEC summit in Riyadh on Nov. 18.
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KAI RYSSDAL: $128.88's what you had to pony up today to buy a barrel of crude oil. In case you haven't been keeping track, that's almost 17 bucks lower than where we started things this week, a 13 percent drop. Wish I could tell you why, but I'd be making it up. It's a not-so secret truth about oil prices. Figuring out why they move the way they do is sometimes more black magic than economics. The rare clear force in the global oil markets is more often referred to by its initials than its actual name: The Organization of the Petroleum Exporting Countries, OPEC.
Ruchir Kadakia's with Cambridge Energy Research Associates. Good to have you with us.
RUCHIR KADAKIA: It's great to be here, thanks.
RYSSDAL: When you talk about oil on the global market, you sort of have to talk about OPEC. I'm wondering if you can give us a sense of how much oil you're talking about when OPEC is the subject.
KADAKIA: You know, OPEC produces around 40 percent of the world's oil. If you look at the growth trend in oil, that percentage is diminishing. And that's largely a part of the fact that OPEC has limited spare capacity and their production isn't ramping up the way that it used to in the past.
RYSSDAL: Well, tell me about that spare capacity. What exactly does that mean?
KADAKIA: Well, spare capacity is how much oil is available in the short term that you can ramp up. The reason why it's so significant in the price of oil and why it's such a large driver is that any type of small disruption in the market can only be met by spare capacity. For example, if a pipeline breaks down for natural reason or if there's some type of geopolitical event, whether it's between Israel and Iran, or whatever it is, you know, you can't just go out and say that, "OK, well, prices have been high now and we're just going to go drill oil and that's going to fix the problem," because there's often a five- to 10-year lead time before that supply ever hits the market. So, it's the spare capacity that you can tap in a couple of months that can bring prices down.
RYSSDAL: When prices get really high and politicians get squeezed to do something about it, they often lean on OPEC. Does OPEC have the spare capacity that the world seems to think it does?
KADAKIA: I don't think they do anymore. You know, it's a relative term when you say "what the world thinks they have." You know, today OPEC has about 2 million gallons of spare capacity. I think everyone probably agrees that it's around 2 million. I think the real problem is that spare capacity has dwindled since 2004. Two million barrels doesn't really cover the type of disruptions that we can see in this market. The market is no longer confident that OPEC can meet the needs should there be some type of disruption.
RYSSDAL: When various OPEC member countries rotate into the presidency of that organization and with that gain the power to literally move the world's oil markets by saying something or not, how carefully do they calibrate what they say?
KADAKIA: Well, you know, irrelevant of who is the president of OPEC, at the end of the day, it's Saudi Arabia and the Saudis that are the most verbal, that have the most influence out of OPEC.
RYSSDAL: If Saudi Arabia is OPEC, then what do the Saudis want to have happen with the world price of oil?
KADAKIA: They want prices to come down drastically. That's probably a misconception out there that, you know, the Middle East wants these high prices and, you know, they're making a tremendous amount of money. There's no question about that. But, you know, the Saudis and OPEC in particular, they they don't need this type of high price environment. Or even our American producers, for example, or international oil companies don't need this type of price. It's just that this is the market's response to the fear that supplies aren't going to be able to keep up with growing demand in the Middle East, Latin America, China and India.
RYSSDAL: Ruchir Kadakia's is an international oil analyst with Cambridge Energy Research Associates. Mr. Kadakia, thanks for your time.
KADAKIA: Thanks for having me out here. I appreciate it.
2 quick responses:
1. First from the commenters question: the way the market works is to prevent a shortage with lines by increasing the price (which helps by decreasing demand and increasing supply). Shortages occur when there are price controls and demand remains stronger than supply. When the market is in control, the price is bid up until someone decides they don't need that much oil and/or producers can bring more to the market.
2. The analyst from CERA needs to get his facts straight (not a big surprise as CERA has been predicting sub-$50 oil throughout its climb to the $140s). He says, "If you look at the growth trend in oil, [OPEC's] percentage is diminishing." Wrong - their market share diminished in the 1980s, but has been increasing since 2004 as non-OPEC supplies stagnate ~50 million barrels per day. The world better hope their market share increases because there is little potential for production increases outside of OPEC as Norway, the UK, the US, Mexico and even Russia are declining. EIA projections have OPEC increasing their share in the coming years.
And on what basis does he believe Saudi Arabia wants a drastic cut in prices? Because they don't "need it?" Billionaires don't "need" more money, but greed keeps our economic system moving along -- and the Saudis are no exception. OPEC plays the role similar to a monopolist, so they are happy to see the price up -- as long as demand stays strong and non-OPEC production continues to stagnate (as it is predicted to do). With little in the way of substitutes for oil in transportation (PHEVs a few years away), I wouldn't be surprised if oil's price doesn't get close to $250 in the medium term (as Gazprom CEO Alexei Miller predicts). The market still seems to have bullish fundamentals from my lens.
Speaking about high gas prices in USA: By definition, if there an oil shortage, then prices would go up, per market forces. If we have gasoline or oil shortage in this country, again by definition, there be a long line of people waiting at the gas pump. Why is there NO long lines at the pump, if there is oil shortage? Base on this simple economic analysis, the oil shortage or the argument that there is more oil demand than supply is erroneous. Someone or some groups are making money of this artificial price hike.
