Sunday, June 22, 2008

Saudi Arabia to Increase Oil Production - US Wants More

Oil WellBecause I follow the market so much and because I'm fascinated (from an economics perspective) with the rising price of gas, I find the calls for Saudi Arabia and other oil-producing nations to produce more oil to be pretty silly.  Yes, I get the fact that American consumers are feeling the pain at the pump.  This is causing all sorts of other problems and will probably lead to the double whammy of inflation and recession, stagflation.  Believe me, I don't want to see that.

But I find the whole situation amusing for a few reasons.   First off, I really think it might be in the best interest of the United States to just let oil stay this hi.  There are already signs that America is pulling back on their gas guzzling ways.  By most accounts, SUV sales are down anywhere between 20%-40% as Americans switch to smaller cars.  Air travel is also down as more and more people are opting to stay at home.  I think in the long term, America will be better off weaning itself from our oil loving ways.  If oil stays this hi, alternatives will be found.  Nothing motivates people like money.  When oil is cheap, nobody has any incentive to find another alternative.  With oil this expensive, the alternatives start looking a lot more attractive.

But here is the kicker.  The oil producing countries get this! I really don't think they want the world's addiction to oil to end any time soon.  But it is hilarious to me to see the United States ask, cajole, and demand these countries to produce more oil.  These countries have every incentive in the world to pump more oil.  Oil, even hard to reach oil, probably only cost about $50 a barrel to produce.  Yet it sells on the market for almost triple that.  Now think about it.  What would you do if you could produce a product and sell it for triple what it cost you to produce?  You would make as much of it as possible as fast as you could!  There really is no reason for the US to keep asking to increase production.  However much the oil industry is a "cartel" believe me, they cheat when they can.  Although they artificially keep supply low on purpose, all the OPEC countries have a huge incentive to cheat on the quota.  They have done it in the past when oil wasn't this hi.  The incentive to cheat is even greater now so what makes anyone think they won't?

So let OPEC do whatever they want to do.  I honestly think the United States, it its smart, can win either way.   Then again, that may be asking too much.


  1. Everywhere you go, it looks like everyone is offering gas gift certificates... The radio, fast food places, car dealerships... but did you read the article on MSN yesterday regarding the brothel that offered gas gift certificates? Just thought that was silly.

  2. [...] to stay for the foreseeable future.  I believe that worldwide demand is going to remain high and if the oil producing countries could bring down the price of oil right now, they would.  I still think some of the better oil names have a ways to go like Schlumberger or Conoco [...]