$60 — $70 Price Floor For Oil??

No, children– the $80 crude price we hit the other day was not that much of a fluke. Here’s some quotes from a recent Economist article.

“The difference between now and then is OPEC’s discovery that booming places like China have a seemingly unquenchable demand for oil. Oil producers, including those in OPEC, struggled to keep up. Prices rose, but demand kept on increasing too. By last summer, OPEC was already pumping as much oil as it could, and markets were fearful that hurricanes in the Gulf of Mexico or a political storm in the Persian Gulf would lead to shortages. The oil price duly rose to over $77 a barrel.

When those fears dissipated, it became clear that there was enough oil to go around after all. But by then, OPEC had developed a taste for $70 oil. So it cut production to stop prices from falling too far. When the oil price reached a new record of $78 a barrel last month, it was thanks as much to OPEC’s diminished output as to runaway demand. The cartel has now proved that it has enough discipline to prop up prices by restraining supply if need be, and also enough spare capacity to temper prices when they rise too high for its liking. In other words, OPEC is back in control of the oil price.”

The basic reason for that is that the actual world capacity to produce oil is near it’s current limits. All cartels, inspire cheaters who will sell more into the market as the profit of their product rises. In this case, OPEC has power again cause even the inspired cheaters don’t have the goods.One realistic way I could be proved wrong about this, is if we have a sudden drop in demand caused by a severe global recession.

One nice thing to think about at the pump is that each time you fill up you are helping in your small way to destroy the world.

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