October 20, 2006 | posted by Michael Baxter in Uncategorized |

OPEC has voted to reduce oil output by 1.2 million
barrels a day. Markets have seen the OPEC move as an attempt to keep the price of oil
at the current sixty-odd dollars a barrel, and stop the recent slide in price.
A couple of years ago, OEPC used to talk about trying to maintain the price of oil
at nearer $40 a barrel. It feared a hike would lead to global recession leading to a
reduction in oil demand. But, now that evidence has suggested the economy can
withstand a much higher price, it would appear the oil cartel believes a higher price is
sustainable.
At least, that is the primie facia evidence. But this interpretation could be
wrong.
When the price of oil is high, producers start looking with renewed vigour for the
black gold elsewhere. They start looking more closely at the oil sands of Alberta
Canada, for example. It’s expensive stuff, but the current price makes it economically
viable to develop. And, once developed, the price of tapping it should reduce.
Then there are renewables - the high price of oil encourages the world to look for
alternatives.
But OPEC understands this. It seems to us more likely that OEPC is reducing
output because it expects the price to fall much further. History tell us that spikes in
the price of oil tend to be a short-term phenomenon, and that the price always falls
back eventually.
From a short-term economic point of view, OEPC’s decision is, in our view, a
sign that oil will continue to fall, helping to lift GDP. If you care about the
environment and global warming, however, a fall in the price of oil must be seen as
bad news, because it forces renewables down the agenda.