What’s the point of throwing a hissy fit if no one is paying attention?
Yesterday, OPEC, the oil cartel in control of nearly 45 percent of the world’s oil, announced it would cut production by a record 2.5 million barrels a day. Nobody seemed to care.
What a difference four months make.
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As the recession has deepened, oil futures have tumbled 74 percent from their high of $147 a barrel on July 11. Consumers have seen enormous relief at the pump, and OPEC is in a dither.
Attitudinal Change
Even three months ago, if OPEC had cut a quarter of what they publicized yesterday, oil futures would have jumped $8 to $10 a barrel. Instead, wholesale oil prices fell below $39 a barrel for the first time since July of ‘04.
OPEC’s leaders are pouting because they had big plans for our money. Now word is leaking out that oil emirates like Kuwait and Dubai are facing significant budget shortfalls. If oil prices continue to fall, the building boom in the Persian Gulf could come to a screeching halt.
Since summer, for example, Dubai’s financial and real estate markets have lost nearly 70 percent of their value. Until recently, 24 percent of the world’s 125,000 construction cranes were occupied in Dubai erecting some of the world’s most innovative and architecturally iconic buildings.
Building Slowdown
As oil prices continue to slide, it’s likely that thousands of building projects throughout the Gulf region will be idled. Even Iran has had to halt construction on the expansion of IKIA – Imam Khomeni International Airport.
There go my vacation plans!
Despite their legendary acumen, OPEC and its legions of Harvard- and Oxford- educated managers have apparently misread the world sentiment and underestimated the severity of the global economic downturn.
While OPEC members may be desperate to squeeze a few more pennies out of the market so that they can continue their spending spree, higher prices at the wellhead will only push demand lower.
OPEC may be able to charge more for what they sell, but as the recession drags on, they’ll be selling less. OPEC’s efforts to elevate global prices also may be counterproductive to its own interests.
How Do You Say Throat-cutting?
OPEC countries like Saudi Arabia control huge swaths of the U.S. financial markets. Prince Alwaleed bin Talal, the nephew of Saudi Arabia’s King Abdullah, is a major stakeholder in Citigroup.
If OPEC actions result in higher prices at the pump, U.S. consumer confidence will sink even lower, causing more layoffs and a more prolonged recession. Higher oil prices will give the new administration more political ammunition to advance its aggressive energy independence agenda.
In other words, OPEC is cutting its own throat.
I don’t know about you, but I hope that OPEC continues it efforts to raise prices, and the American people finally get the fortitude to turn the tables on these greedy bums!
John Cohn is a senior partner in the Globe West Financial Group[ based in West Los Angeles. He may be contacted at www.globewestfinancial.com
