COMMENTARY | COLUMNISTS | JOHN PATRICK FORD

How far will OPEC go?

If you are a business-news junkie like me, you could hardly miss the trends of the past two months that presumably predict the 2015 economy. Before the holiday season and on into January, retailing was a priority fiscal indicator. Now we have oil production as a runner-up for the most crucial headline of the day.

I already vented my dismay over the emphasis of shopping for deals on Thanksgiving Day and the public’s apparent monthlong need to storm the stores and crowd the Internet right up to Christmas Day in my Jan. 1 column (“Spirit of Christmas centers on malls”). Despite my reaction to commercial exploitation of family traditions, the retailers loved it.

Now I am enduring the media blitz on the petroleum industry’s economic plight. We should all be happy that gasoline prices have retreated from $4-plus per gallon at the pump. Economists heralded another boost in consumer spending with their extra pocket money. So far that hasn’t happened, as reported daily in the business-news media.

To make the situation worse, the recent U.S. startup drilling companies are losing money at the current $50 per barrel for crude oil. That means job losses and some chaos in the financial markets because, like retailing, oil is a driving economic force. Should we be wringing our hands over the plight of the U.S., Canadian and Mideast oil barons who were doing quite well at $100-plus oil prices before the slump?

That is an economic dilemma that has financial analysts scrambling for an answer. We hear endless remedies on the nightly business reports, but no one seems to have a good explanation why oil prices are down roughly 50 percent or more as the market fluctuates. I have a solution that only a few experts in the petroleum industry have dared to mention.

When the price of oil approached $100 per barrel, speculators in oil exploration jumped on the opportunity to find new sources in America. Most notable is the fracking taking place in North Dakota and other oil-producing areas. The result was a surge in American independent oil producers that potentially threatened the OPEC cartel headed by Saudi Arabia.

For many decades, Saudi oil interests have controlled the market in both production and pricing. No doubt it was alarming to realize that American producers were cashing in on the high price of oil created by OPEC. It is my theory that OPEC is letting the current market price of oil slip to a level where the new independent oil producers cannot make a profit.

It seems simple enough as I am told that the Saudi oil monopoly can produce oil for $5 a barrel. If oil sold for only $10 a barrel, they would still make a 100 percent profit. Not bad.

Extending that theory, it is logical that Saudi Arabia will let the price drop until the American independent oil producers shut down, allowing OPEC to again have complete control of the supply and price of petroleum. The economic damage to the independents, job losses and bank loan defaults will hurt American business across the board.

The makers of electric and hybrid automobiles are already complaining. Sales of these models have dropped off as gasoline prices come down. BMW predicts it will be a short-term decline that will reverse when gas prices go back up. That will help to sell their high-end zero-emission models.

Another victim of lower gas prices is British Petroleum, the third largest corporation in the United Kingdom. Due to the heavy fines assessed against the company for the Gulf of Mexico oil spill — $43 billion so far — the company is stripping away one-third of its assets. Now the cut in oil prices influences its generous dividend policy and consequently the company’s stock price.

Other international oil firms are circling to zoom in to take over, affecting BP’s American interests and our economy.

Apparently, nothing can be done to slow the drop in oil prices except a shortage of product or OPEC meddling in the market. Meanwhile, retailers are hopeful.


Ford is a freelance writer in San Diego. He can be reached at johnpatrick.ford@sddt.com.

User Response
0 UserComments