Tuesday, September 9, 2008

OPEC Is Killing Itself

OPEC decided to move into irrelevance. Today's cut is an illustration. It's a repeat of endless cuts in the end of 1970s and beginning of 1980, when OPEC (with a little help from Iran, remember 1979 revolution) ran oil price into $40 (huge price then, probably somewhat close to $110 now, taking inflation into account). Then cuts led to constant cheating among OPEC members (and how do we know it doesn't happen now), Norway and UK started producing North Sea oil, USSR put more oil on sale and priced dropped to $30 in 1983, below $15 in 1986 and below $10 in 1998. People who think that we are at peak of oil are up for a big surprise fairly soon: new developments in the Gulf and Brazil are coming online soon, Iraq increases oil production (and far from reaching its quote), and oil sands in Canada are booming. If new technologies increase shale oil yield at least to 5%, we are going to have plenty of oil soon.

I don't know how much oil will cost tomorrow. It might go up, or down. But eventually, in several years, oil is going down to $50, which is cost of deep underwater extraction and top cost of oil from sands. It might (and will at some point) go even lower, because markets don't care about production costs.

Can we make money on oil right now? Afraid not, too many unknowns.

More on basket case countries:

Basket cases:
Pakistan: type 2. Might recover some time, but I'm not sure.
Bangladesh: type 1 (?).
Burma (Myanmar): type 2.
Sri Lanka: type 1.
Afghanistan: type 2. Current situation is a result of internal troubles, Soviet aggression and Pakistan meddling. Soviet initial support for "revolution" which turned into full blown aggression is the main reason. Maybe US and NATO allies can save it, but they need to spend a lot of time and money. I think there is no choice but doing that, but who knows! Wish this country well.

All above countries are bad cases of mismanagement, nearby India, China, Vietnam are good examples how some economic freedom coupled with more or less reasonable economic policies can save even extremely bad basket cases (China).

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