Folks,

FYI.  WTO says enough about them, let us now shift/focus
attention on OPEC.

OB Silla.
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MONEYBOX
Does OPEC Have Us Over a Barrel Again?
James Surowiecki
Posted Tuesday, Nov. 30, 1999, at 4:46 p.m.


It may not be the greatest comeback in business history, but
the re-ascendance of OPEC is certainly one of the more
surprising turnarounds in recent memory. Back in March, the
benchmark price of West Texas Intermediate crude oil was $13
a barrel, and it seemed to be a foregone conclusion that the
ability of the world's key oil-producing nations to keep
prices high had forever vanished. In an earlier incarnation
[http://www.slate.com/MotleyFool/97-12-11/MotleyFool.asp] of
this column, in fact, I argued that the combination of new
oil-discovery and oil-recovery technology with the advent of
the spot futures market in oil meant that the OPEC's glory
days were long gone. So why are oil prices now at $27 a
barrel, with consumption actually outpacing production, and
the OPEC nations holding firm?

The simplest answer--and the simplest excuse for that earlier
column--is that no one ever suggested that transformations in
the oil industry were going to have the effect of repealing
the laws of supply and demand. Oil prices have doubled
because the global economy has made a powerful recovery in
the past 12 months. The U.S. economy has grown faster than it
did in 1998, Europe is now humming along nicely, Japan has
crawled out of recession (at least for the moment), and much
of Asia is now moving again. (Some predictions call for
Korea, for instance, to grow at 12 percent next year.) Since
oil prices are prospective, the markets do not anticipate a
global slowdown any time soon. And the more oil consumers
want, the more expensive it will become.

Until, that is, more oil becomes available, either through
expanded production by the leading oil-producing nations or
expanded exploitation of existing reserves by the giant oil
multinationals. And here's where the "foregone conclusion"
looks a little less foregone, primarily because both OPEC and
non-member countries, such as Mexico and Norway, have shown
restraint in the face of rising prices. The history of OPEC,
at least since the mid-1980s, has been one of massive
cheating on the part of its members, who have regularly
violated their production quotas in order to reap as much
profit as possible. That, of course, has sent prices
tumbling. At the same time, OPEC has had an impossible time
dealing with its non-member competitors, who were prone to
flood the market at any time.

Prices have also stayed high because the major oil companies,
having been burned in the past, have been temperate in
expanding their exploration and production budgets. Although
most of the majors will do more capital spending in 2000 and
2001 than they did last year, their annual budgets for the
next couple of years will probably not equal what they were
as recently as 1996. That's what a few of years of
$13-a-barrel prices will do for you.

Still, there's another way to look at the relatively tempered
way the oil giants are expanding those budgets, and that is
that they do not see prices going, as some have suggested, to
$35 a barrel. In fact, the oil companies appear to be
planning on prices between $20 and $25 a barrel, which would
mean that while filling up your tank is going to be more
expensive than it was nine months ago, any inflationary
impact from oil prices will be seriously muted.

There's no guarantee that the oil companies are right. But
there's an excellent chance that they are, because the
structural transformations in the world oil market are real,
and so too is the fact that running a cartel has not gotten
any easier in the past couple of years. Price-fixing cartels
can work quite well in the short term. But over the long run
the incentive to cheat is simply too high, and the measures
of coercion and punishment simply too weak, to keep everyone
in line. At the moment, the memories of what low oil prices
were like are probably strong enough to keep Venezuela, for
instance, from pumping oil as fast as it can. But memories
fade, and cash in the bank can sometimes look like forever.
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