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Cherished oil myths: OPEC overcapacity

For people who like things symmetrical we can say that belief in OPEC overcapacity is a cheap oil myth. The opposite myth, or rather belief, and increasingle easy to prove is that both OPEC and nonOPEC suppliers are not able to keep pace with world demand, their own domestic oil consumption, and ward off depletion losses. These are estimated by ExxonMobil at around 3 Million barrels/day of world output capacity lost, each year.

Expensive oil facts and beliefs are becoming daily reality despite heroic efforts of traders and analysts eagerly awaiting the 'collapse of oil demand following winter', while OPEC and nonOPEC suppliers stoically pump all they can, at whatever price they get.

This folklore worked fine for cheap oil in the 1986-1999 period. At the time world demand was only slowly recovering from the neoliberal recession of the early 1980s, claimed by its defenders as necessary to fight overpriced oil, through sky high interest rates.

This enabled the myth of OPEC being afflicted by 'overcapacity', that it can only pump too much, to be floated high into the world's media. But imagining that OPEC is one cohesive, and in Wall Street Journal mythology "purely evil" cartel is about as fanciful as thinking G W Bush is the natural choice of all American voters. Its Middle East 'core group' of exporters, once upon a time including Iraq which today exports a lot less than Mexico and barely more than Angola, is entirely dominated by Saudi Arabia. Next in line by net exports come Russia and Norway, neither of which is an OPEC member. While Norway's output is slowly but surely diminshing, Russia's can be held up a while longer.

In effective terms and on the supply side, Russia and Saudi Arabia control and fix prices, while on the demand side the rumor mill around the NYMEX does what it can to exaggerate price swings. Traders make money when prices change, not when they stay fixed. Plenty of traders and analysts, of the published variety, either believe outright or under their breath that cheap oil is good for the economy - but business is business, and theirs is to talk prices up and down!

OPEC can do little in reality about oil prices, except to have its oil ministers stride to the microphone and say that they too think oil is "too expensive". This draws on another myth, used by Sheikh Yamani for many long years. Its modern equivalent is that Arnie Schwarzenegger's imaginary and impossible Hydrogen Economy will pop up overnight, and send oil demand spinning down out of sight.

The chances of this happening are less even than G W Bush having a third term, which would only need changing the US consitution, while replacing current oil use with hydrogen would need a repeal of the Laws of Thermodynamics. Other than this 'fuel substitution' myth there is the economic crisis myth: high priced oil will automatically cause world financial or economic crisis, which can even hurt the "evil cartel".

Likely that the gosh-and-golly oil analyst fraternity dwell little on what happens to burnt out, fallen-by-wayside, ex-OPEC countries. These include impoverished Ecuador and unflourishing Gabon, and will very soon include Indonesia, unless OPEC is changed to OGEC, the gas exporters cartel ! By about 2012 it is likely that Iran, already completely or 'structurally' dependent on oil product imports, ceases to have net export status for crude.

As it gets more expensive to keep up export surpluses, competing uses for government revenues - like education and agriculture - become more urgent, more useful and more responsible ways to face the future. Reducing oil exports will tend to put a floor to price falls, whether OPEC member or not...

OPEC "overcapacity" can be set in numbers. In the last 12 months world oil import demand increased by well over 3 Million barrels/day, while consumption increased by a mere 2.6 Mbd. Three years of growth of the 2004 vintage, with oil prices up to 55 USD/barrel, will need one new Saudi Arabia or two new Russias. Where exactly these will come from isnt spelled out by analysts and traders itching to mark down prices when the post-winter glut happens, but it surely wont be easy or cheap.

The myth of OPEC overcapacity is only dying slowly, but near the end will accelerate very fast: perhaps this year, and certainly by 2007 or 2008 it will have disappeared.

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