OPEC and Peak Oil: What is a “fair” price for oil?

With stagflation rapidly taking over our economy, we get this from OPEC about the best “fair” price for oil: “Ninety dollars [a barrel] won’t hinder growth…”

WTF?

The last time that oil was $90 a barrel it was in free fall after reaching a high of $147 and collapsing our economy.  And now we hear the $90 per barrel is a fair price.

Well, let’s review OPEC”s statement’s about what exactly constitutes a fair price for oil:

In 2003 the fair price was around $25:  “The 11 OPEC countries have managed their output during the past two decades to maintain stability in the average price of the cartel’s “basket” of seven crudes. They consider the optimal price range for consumer and producer nations alike to be $22 to $28 a barrel.”

In September 2004 it was still $25 per barrel:  “The price of a barrel of oil that has breached the $50 level is “clearly way too high,” Adel Al-Jubeir, an adviser to the Saudi crown prince, said. “We believe $50 a barrel is clearly way too high,” al-Jubeir told CNBC television. “We believe the price of oil should be between $22-28.” He said he believed that $25 a barrel was “the most optimum” price for oil.

On September 9th, 2006:  “OPEC members long have contended that the $50 range was ideal.” (YOU ARE SHITTING ME?  Just two years before the Crown Prince of Saudi Arabia said $50 was too high! So something less than two years is “long contended…”)

2009:  José Botelho de Vasconcelos, the Angolan Oil Minister who is the present president of Opec, said that oil prices of between $75 and $80 per barrel were at an optimum level for both consumers and producers.  However, he said that any further rise towards $100 per barrel threatened to sabotage the nascent global economic recovery. “I think a balanced price is always better. You know that, if necessary, some countries are open to injecting more oil into the market and that will be done . . . We need to maintain the balance.”

March 22, 2010:  Since last June prices ranged around 70 to 80 dollars a barrel, “a level which is acceptable to producers which at the same time does not dampen the prospects for economic recovery,” said United Arab Emirates Energy Minister Mohamed bin Dhaen al-Hamli.

November, 5, 2010:  OPEC signaled the economic recovery would continue even if oil prices were to rise a little higher. The group’s secretary general, Abdalla Salem El-Badri, told reporters in Vienna Thursday, “Ninety dollars [a barrel] won’t hinder growth.”  Wall Street Journal

So let’s review OPEC’s statements about the fair price of oil:

2003:  $25 a barrel

2004:  $25 a barrel (“$50 is way to high”)

2006:  $50 a barrel

2009:  $75-$80 – (“$100 too high”)

3/2010:  $70-$80 a barrel

11/2010:  $90 a barrel

So what could be causing this?   Is this OPEC’s greed?  Is this recognition of the debased value of the dollar? Are speculators to blame?

Probably all of that is in play.  But to me it is fundamentally simple:  OPEC realizes that supply can’t keep up with demand, meaning that the price of oil is going to have to rise.  OPEC’s ability to accept $90  barrel oil is most likely an admission that they don’t have the ability to produce more to keep prices lower. So they set their price targets as high as they think they can get away with and still justify that somehow economic growth is going to continue.  A debased dollar and speculators are the result of peak oil, not the cause of it.   A “fair” price that has risen by more than 300% in 7 years  is a sure economic sign of peak oil.

The only question I have now is at what price does the oil shock occur?   If it happens lower than $147, then that would tell me that the economy was very fragile and will be hard to ever restart as even moderately high prices will box it in.  If the shock occurs above $147, then that would tell me the economy has some room in which to expand before high prices pop it.  This is the better scenario if you’re into “growth” – some can still occur even in a high oil price environment.  That doesn’t mean that it won’t cripple the economy.  It just means that there’s a little more rebound room.  The earlier scenario – economy faltering below $147 a barrel oil  – will mean the end of any chance of economic growth as we’ve known it.

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One response to “OPEC and Peak Oil: What is a “fair” price for oil?

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