The Taps Open
Last Wednesday I suggested that the only thing likely to bring prices down in the short run was a change in OPEC policy, driven by the Saudis. I concluded by saying that the price of oil in the near future will be largely what the Saudis desire it to be. They now seem to want it to be lower.

Saudi Arabia is in a unique position in the oil world. Not only do they wield enormous power as one of the largest exporters of oil, but their reserves give them a long-term perspective that few others can share or even afford. With 260 billion barrels of oil reserves, roughly a quarter of the known reserves on earth, they realize they are not playing a short-term game, and are also aware that consuming countries, while unable to do without their product today, have many more options than they did even a decade ago, given enough time and incentive to switch.

$40 per barrel seems to be the threshold at which the Saudis become concerned about upending the global economy and threatening the value of their long-term reserves. If the indicated 1.5 million barrel per day increase in OPEC quotas is approved at OPEC's June 3 meeting and actually translates into a comparable growth trend in oil inventories--instead of providing cover for quota cheating already occurring--then it should be sufficient to push prices closer to $30/barrel by the fall.

This stock build will only happen if non-OPEC production remains stable or grows somewhat, especially in Russia. Today's Wall St. Journal contains a good discussion on this topic.

At roughly $30 per barrel, the pressure on consumers should ease, despite the other factors that have contributed to high gasoline prices, including product specifications and refinery constraints. A drop of $8 or $9 per barrel of crude oil would not only eventually take 20 cents per gallon out of the cost of gasoline, but it would also change market psychology that encourages distributors to hold more inventory than they need, because they believe it will be worth more tomorrow. That could be good for another 5 to 10 cents per gallon.

All of this would help consumers, and it couldn't hurt incumbent politicians, either.