Whether by accident or design, we’ve just been through a wee experiment on how higher fuel prices affect growth. Admittedly, it is difficult teasing out the impact of the credit crunch versus the oil and commodities spike, but in the US, habits started to change at $4 a gallon of gas, a lower level than most anticipated. Miles driven fell in the US, UK, and EU. “Staycation” entered the popular lexicon.
With oil prices having fallen nearly 40% from their peak, one might imagine OPEC curtailing production to support or increase the price. No such move is in the offing now, although if inventories increase, the cartel may change its posture.
OPEC does not want to kill the goose that lays the golden egg. Having oil prices too high is not optimal for them because while they might in theory maximize short-term revenues, they also lead to conservation (not simply driving less, but a much harder push for more energy efficient devices) and make alternative energy sources more viable.
French minister Jean Baptiste Colbert once said, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” A similar process is at work here.
OPEC, the supplier of 40 percent of the world’s oil, will probably keep producing at a record pace as $109-a-barrel crude squeezes the global economy.
The 13-nation Organization of Petroleum Exporting Countries will reject calls from Venezuela and Iran to trim supplies at its Sept. 9 meeting in Vienna, according to 29 of the 32 energy analysts surveyed by Bloomberg.
Yves here. Forgive me if you already know this, but Venezuela and Iran are predictable advocates of higher oil prices because their crude is the nasty heavy sort which is economically competitive only when prices are high.
Back to Bloomberg:
Record oil prices spurred European inflation to 4 percent in July and contributed to the first quarterly contraction in the region’s economy since the euro was introduced almost a decade ago. In the U.S., gasoline demand fell for 19 consecutive weeks, according to MasterCard Inc., with fuel now near $3.70 a gallon….
Oil stockpiles, excluding government reserves, were above average in July and enough to meet 54 days of demand, according to the International Energy Agency in Paris.
The agency urged OPEC not to cut back because prices are “putting a burden on the global economy,” Executive Director Nobuo Tanaka said in an Aug. 27 interview in Stavanger, Norway.
“If stocks were ballooning then you could see pressure mounting within the cartel for a cut,” said Harry Tchilinguirian, senior oil analyst at BNP Paribas SA….
OPEC “probably doesn’t want to see another run at $150,” said Societe Generale’s [head of oil research Mike] Wittner. “But they’re worried the $35 downward correction will continue.”