As this evening's meeting of OPEC oil ministers convenes, word out of Vienna is that the oil cartel will keep production at current levels. This is a foolish move, focused on maximizing short term profits at the expense of long-term demand for oil.
While world markets breathe a collective sigh of relief that the price of oil has fallen dramatically from its July highs, a barrel of crude still goes for more than $100, 25% higher than this time last year. OPEC would like nothing more than to see the price settle in the $100 range.
Greed is the likely motivator. Other than oil, many OPEC countries such as Saudia Arabia, Iran, Nigeria and Venezuela have little else of value to offer world markets. With their principal commodity selling at historic highs, times are good for petro-dictators.
But there is another possible explanation for keeping production at current levels: OPEC may be running out of oil.
Though they claim their oil reserves will last for hundreds of years, some experts estimate that the supply has already peaked. If that's the case, it would make sense for OPEC to keep production at current levels as long as possible, milking the cow while it's still breathing.
But keeping production at current levels (or lowering them) will only hasten the day when the world migrates to other sources of energy. If gasoline prices in the United States remain in the $3.50-$4.00 range, demand for oil will continue to decrease as American consumers seek more fuel efficient vehicles, or use public transportation. There will be a heavy incentive among automobile manufacturers and public utilities to develop new transporation and power alternatives that have little, if any, reliance on oil.
If OPEC really has supplies that will last for centuries, they would be wise to significantly increase oil production over the next 12-24 months, flood world markets and bring the price for a barrel back down to the $50-60 range. This would bring gas prices below $3/gallon and seriously undercut growing consumer demand for new cars that are either more fuel efficient or run on alternative sources.
Perhaps on their way to Vienna, some OPEC oil ministers stopped by the Republican National Convention in St. Paul and were enchanted with the chant of 'Drill, Drill, Drill' that arose for the Xcel Energy floor. Someone should explain to them that in America, campaign slogans rarely reflect reality.