1/31/2005

Opec's Greedy Strategy

Opec has lead the market in "black gold" for quite some time and is quite persistent to keep the momentum going in the area. Opec, since the 1970s has continually pushed all of its customers by trying to maximize revenue while trying to maximize price. Of course, this is something that any good business would strive for but has Opec taken it too far? Fear, Greed & A Barrel Of Crude informs us that gas prices per barrel rose and closed in New York today above $48 a barrel. Before we know it, I bet the price will reach above $50 a barrel and that means well on the road to $60. If this happens I feel quite confident that people will look for other means of transportation or at least development enginneers and others will look to create and perfect other means of giving a vehicle power.

Many countries are already rationing their investments in the area and planning for the future. Opec can clearly see that it walks a fine line to keeping everyone pleased. One Russian observer remarked, "We can assume that the oil prices will not go down in the near future because there are no indications of the coming seasonal drop in the demand for oil, in particular, due to a rather cold winter in the United States." We constantly hear complaints, or perhaps we complain ourselves, about the price for a gallon of gas. Well, things don't seem to be looking too bright in the future for this area. Opec has the strategy figured out: it tells traders one thing and sends false signals while surprising the market on the other hand. Will Opec go on with its greedy ways? Will the world market tolerate it? These are the questions that come to my mind.

33 comments:

Nick said...

I think that the world will let Opec continue to be greedy for the time being but Opec will get theirs in the end. People are always looking for a much more efficient and cheaper way to do things, so why no with oil. When a cheaper alternative to oil is created then there won't be a demand for Opec's oil then the demand for Opec's oil will be gone.

Rex said...

My in-laws were in England this past summer and noted that gas prices were around $3.30 a litre, by their estimate. Now a litre is almost a quart(0.9461 of a gallon). So if you figure $3.30 for one quart and four quarts per gallon then a gallon of gas will set you back $13.20.

People say that oil is a nonrenewable resource and one day it will dry up. I would disagree with this thinking because when oil reaches a certain price, only a select few people will be willing to purchase it.

There are a number of car manufactures that are trying to develop new technology to get better gas mileage in their cars. Honda and Toyota have come up with hybrids that can get over 50 miles per gallon. Chevrolet is developing a hydrogen based car that has a hydrogen cell battery in the frame that will accept many different kinds of bodies. OPEC may be greedy now, but their days are numbered!

Eric said...

Sure we have come a long way in car improvements since Henry Ford rolled out his first Model-T. I wouldn't want to give up my heater, air conditioner, or air bag. But the technology behind what powers the car the internal combustion engine in now reaching its century mark! It is time for a new means to power our vehicles, and higher gas prices only speeds up the process by increasing the benefits to the would be inventor. So I say let OPEC do its thing, because the market is going to do its own.

BOB said...

OPEC may be the producer of approximately 1/3 of the world's oil, but why does it have such a large impact on the market price? Is it possible for OPEC to buy oil futures in an effort to raise their own future prices? Dr. Tufte, can you help me understand this?

Chuck said...

OPEC reminds me of the big bad bully on the playground at recess. They seem to make the rules and there is little one can do in the short run about it. Automobile manufactures, and American people are feeling this sense of bulling and will find a way around having to use petroleum as the main sorce of transportation energy. As Eric has already commented, the same market that has made opec successful may be the same market that could hang them out to dry.

Dr. Tufte said...

-1 for spelling errors (waived)

No business can simultaneously maximize revenue and price. Typically, you can't maximize any two variables at the same time. What OPEC is trying to do is maximize profits.

It isn't correct to claim that oil prices are particularly high either. They are higher than they have been, but not high by historical standards after you adjust for inflation. This is a hard point for people to digest, but the flip side is the terrorists we see coming out of Saudi Arabia because their economy is not thriving.

Also, the post says little about the effects of oil demand. The world has just gone through its best year economically since the early 1970s. That alone will tend to push oil prices higher. It is probable that our latest run-up in oil prices has more to do with that, than anything OPEC does.

On the whole, the post and comments show a great deal of paranoia about OPEC (that is a pretty common sentiment in the U.S.). I recommend backing off and lightening up about this. OPEC's importance on the world stage is already a thing of the past. It's a bogeyman that we haven't quite got out of our collective psyches yet.

Regarding the high gas prices in the U.K., this is largely caused by differences in taxes. Since gasoline has an inelastic demand, it makes an inviting target for taxation. A big chunk of what you pay at the pump here is taxes, and that chunk is larger in many other countries.

As to BOB's question about whether OPEC could use futures to manipulate oil prices, the answer is yes. But this would not be a good thing to do. Futures serve a purpose for people who have legitimate risks to hedge. But for speculative purposes they offer very high risk that probably isn't justified by their returns. That's why the actual number of people that you meet who have made themselves rich trading futures is actually pretty small (or alternatively, why her opponents are so certain that Senator Clinton was involved with criminal activity because of the ease and certainty with which she made money on futures).

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