The papers and newsites are full of OPEC's announced 10% production cuts. In response, West Texas Intermediate crude oil futures are trading close to their contract highs for the year.
We've seen this dance before: OPEC struggles to rein in overproduction by its members to stave off a possible future price collapse, even though prices appear robust at the moment. It is always a tricky maneuver, and this time the possible consequences of guessing wrong are particularly high for both the industrialized world and for the oil producers.
Coming at a time when US industry is already under pressure from high natural gas prices, and when gasoline inventories are tight, OPEC's cut risks undermining the US economic recovery and compound the problems that the rise of the Euro against the dollar have created for European firms. I don't doubt that they have thought about these possibilities.
OPEC must always try to walk the line between prices that are too low to support the social programs its members fund with oil revenues, or so high that they reduce demand and stimulate non-OPEC producers to increase their output, not just in the short term but for years to come. This year they should consider another possible outcome of prices that are too high: the election of a US President less likely to understand their concerns and empowered to introduce measures that would begin to cut into US demand for imported oil.
A number of commentators have suggested a crucial difference between a new Democratic administration and that of Bill Clinton. Whatever his personal faults, Bill Clinton believed in free trade and free markets. Whichever Democrat wins his party's nomination--and it's looking increasingly remote that it will be anyone other than John Kerry--he will run on a platform that sees free trade as an obstacle to employment and growth, and that views oil--imported or otherwise--as a necessary evil to be minimized by whatever means necessary, whether market-based or not.
This would not be a happy outcome for OPEC, or for the Saudis in particular. As the stewards of the largest oil reserves on earth, they have a vested interest in oil remaining the transportation fuel of choice for the rest of the 21st Century. If they have been paying attention, and I believe they have, they must realize that the technologies and tools for beginning to wean the world off its dependence on oil are much closer to practicality than they were even a decade ago.
We should know by summer whether the OPEC ministers were prudent or shortsighted in their decision.