Sunday, June 12, 2011

The End of OPEC is America's Blessing

Earlier this week, of the Organization of Petroleum Exporting Countries surprised both the market and analysts when it decided not to increase production quotas.
"This one of the worst meetings we ever had in OPEC," Saudi Arabian oil minister Ali Naimi told reporters after the meeting had ended. With that, he signaled something so many of us have been waiting for our entire lives: the beginning of the end of OPEC.
And the end of OPEC would be a blessing for America.
The OPEC cartel was created in 1960. It’s an illegal cartel comprised of 12 oil-producing countries, and its sole purpose is to control the supply of oil that reaches the market and manipulate its price. This illegal monopoly has successfully kept production low and price high for more than 50 years. Let’s look at some numbers.
In 1971, OPEC countries supplied around 28-29 million barrels a day. As of last Wednesday? That number has skyrocketed to 28.8 million barrels a day.
Oh, I should probably mention that the world economy is five times the size it was in 1971. You don’t have to be a grassy-knoll type to see that OPEC is a conspiracy of historical proportions.
 If that doesn’t signal some sort of conspiracy, I don’t know what does.
The free market doesn’t allow illegal cartels/monopolies/conspirators like this to control any other asset or commodity class like this. Think about software and what happened with Microsoft.
Think about banks.
Even good old Ma Bell.
Why would we possibly allow this gang of thugs to continue to artificially inflate prices, engage in “whisper selling” and falsify production numbers?
Even before Naimi’s statement, we were seeing chinks in oil’s armor. We just got through the so-called Arab Spring, when Democratic revolutions swept through oil-rich kingdoms.
Canada, a country that wasn’t even considered a player back then, is now the source of the majority of oil consumed in the U.S. Ethanol, made from corn here in the States and from sugar in places like Brazil, has proved to be a viable alternative to oil.
In fact, just this week Brazil’s government announced a finance and incentive plan to dramatically boost ethanol production and use in the short term.
Chinks in the armor are one thing. Naimi’s statement was a full-on crack.  It’s a sign that there’s disconnect. Trouble in the ranks.
Saudi Arabia is the big dog in the OPEC cartel. It’s always believed that its rightful place is in control of global market share. The Saudis know that other OPEC countries have become dependent on $100 oil—their very budgets and political systems would crumble without it. They’re tired of wearing the leash.
And that, my friends, is a victory for the free market.
If the Saudis get what they presumably want and OPEC were to be dismantled, I believe it would drive oil down to the $70-$80 range. If it got to that level, it could even trigger a production war driving prices even lower.
But regardless of long-term demand for oil, the short term effect will be to drive demand down. This wouldn’t change the long-term Growthflation scenario, this once-in-a-lifetime convergence of a global growth story simultaneous to demand-driven inflation that will drive markets in all asset and commodity classes for years to come.
What it would do is slow the velocity of that inflation to a healthy and sustainable rate.
The end of OPEC would be a blessing for U.S. consumers. The end of OPEC would be a blessing for U.S. equities. And ultimately, end of OPEC would be a blessing for the American economy.
Now, if we could just do something about these horrible domestic policy decisions being made by my fellow Chicagoan…

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