OPEC needs a lesson in economics

OPEC is announcing a cutback in oil production in an attempt to boost the price.  By making it less available they hope the market will drive the price up as buyers compete with each other.  That tactic works when demand outpaces supply however, it is not effective when demand is decelerating.

The world’s demand for oil is going through as severe a retraction as the world’s economy.  It doesn’t take a degree in economics to understand that as people and companies stop purchasing “stuff” manufacturing slows, and in some cases production ceases, at least temporarily.

What the price increase might mean, however, is that families and companies that are already struggling will cut back even further, further reducing worldwide demand for oil.

Millions of people around the globe have lost their job, and the layoffs just keep coming.  These jobs are concentrated within whatever passes for the middle class of the country where they occur, the very sector that fuels the economies of the world.  A vicious cycle.

OPEC’s attempt to push the price of oil up, while understandable, is only going to make what we can’t afford now all the more unaffordable, becoming yet another component of the above vicious cycle.

The the last number of quarters, when public companies release their earnings report, many become outraged over the “windfall profits” enjoyed by oil companies.  Each quarter seems to break the record set by the previous earnings report.  These “windfall profits” are not driven by price gouging, the profit margin is actual quite small, instead, it is volume.  Earn a “little” on an ever increasing number of “units”.  Well, need I say those record-breaking windfall profits are probably on hold for big oil as well because they are seeing record breaking reduction in demand as well.

It does seem a bit strange that at a time when countries are scrambling every bit of wherewithal to stem the effects of recession on their economies OPEC chooses to feed their greed.  Admitting I’m no fan of OPEC, their actions still boggle my brain.  But hey, if the US reduces its consumption enough we can fill our needs more readily from non-OPEC exporters.

Two of those non-OPEC exporters happen to be Canada and Mexico.  2007 statistics of US oil imports list Canada as supplying 18% and Mexico supplying 14%; Saudi Arabia supplies slightly more than Mexico.

So here I sit hoping OPEC’s actions backfire on them and benefit Canada and Mexico, two countries that actually have broader positive impact on the US economy and in turn, US jobs.

SZ