The Organization of Petroleum Exporting Countries seeks a Goldilocks price of oil - not too low, ensuring a hefty flow of dollars into cartel member treasuries - and not too high, ensuring that the cartel doesn't crash the economies of its customers and collapse demand.
Came across an interesting commentary from energy economist Ferdinand Banks explaining why the Goldilocks price of oil has been moving upward since the early part of the 2000s (or the 'oughts if you like). His argument is that OPEC has taken advantage of market shifts to exert greater control over prices.
According to Banks, OPEC follows a long-range strategy of producing as little oil as it can get away with. The longer cartel members can keep oil in the ground, the more oil they can save for later use in making and selling high-value petrochemicals as an economic diversification strategy.
Here's what changed in the early 'oughts: Around 2003 and 2004, surging economic growth in China and India began pushing up oil demand, like an updraft lifting a balloon on a hot summer day. It was the opportunity of the century for OPEC. With demand outrunning supply, OPEC was in a stronger position to leverage up prices to a higher price point, as Banks contends the cartel accomplished following the late 2008 price plunge, when the per-barrel price dropped from $147 to $32. At that time, OPEC sliced production and prices doubled back up to around $75 per barrel, even as the economy was dropping like a brick.
Don't spend too much time obsessing over speculators, Banks argues. Speculators making bets on oil price movements are following, not leading the market. Traders do not have to be "particularly smart," he wrote. "What they had to do to make serious money was to recognize that demand was outrunning supply, and one of the reasons is OPEC and its agenda becoming the determining factor on the supply side of the oil market, which is still the case."
Food for thought at your next fill-up. Happy autumn.
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