When Did $100 Oil Become Acceptable to Defend?
Here in Vienna the sun is shining, it is 85 degrees outside and global energy concerns, hurricanes in the Gulf of Mexico, et al seem a long way away.
I'm sitting in here in the lobby of the Intercontinental Hotel—which acts as the unofficial press room for the media pack that has dutifully followed the OPEC circus—back to the Austrian capital for its latest get together.
This time round the meeting has the usual subplots and political intrigue, but also, for the first time in recent years, we are wondering about what support mechanisms for the price of crude might be put in place rather than how can we stop the runway price of the black stuff.
Oil has, of course, fallen nearly 30 percent from the $147 July highs and now OPEC is pretty concerned that it will be unable to defend $100 a barrel, if indeed we are staring at not only a recession in the United States and the West, but, perhaps more worryingly, a hard landing in China.
And here's the conundrum. Since when did $100 per barrel become the acceptable price to defend? Let's face it, you won't hear Obama, McCain—or any other politician for that matter—saying they find triple-digit crude acceptable. And yet, as ever, it's not as simple as that.
The recent spike in oil has started making a difference to how we consume oil. We've started using our automobiles more sensibly, we took off unrealistic state price caps, we boosted our investment in longer-term alternatives such as electric, biofuel, solar, nuclear, clean coal technology and the rest. What happens if the price goes below $100, below $90 or even sub-$80 per barrel. Do we just pull the plug on expensive energy alternatives?
And what happens to new oil production? Does that just not get the investment dollars? It is not as simple as in the old days where it cost less than $10 to get a barrel of oil out of the ground.
Now we are told that the marginal cost of oil is as high as $80. If you believe that then logically which producer—whether state-owned National oil company or International oil companies such as Exxon and BP—is going to take the chance on new expensive facilities? In addition, the last time I looked, the costs for oil companies were still sky high despite the fall in crude prices. Rig rates are still quadruple what they were a couple of years ago.
So how to engineer a cut in production without appearing to insult global consumers ahead of peak demand in the fourth quarter? This is the big question today and one that might be answered by just stripping out the "cheating." OPEC currently produced just under 800,000 barrels per day more than agreed levels and the hawks such as Iran and Venezuela may be placated if Saudi, the key swing producer, just turns down the taps on its majority share of that overproduction.
Thereafter, OPEC will probably give out a signal that it is watching and waiting for signs of oversupply in the global market and that it stands ready to cut actual agreed production levels whether in December at its Algerian meeting or even before then in October or November if the rumor mill is to be believed.
Note: This time round OPEC’s meeting starts at 9 pm local time (3 p.m. New York time) as it observes Ramadan in the Islamic lunar calendar. The OPEC press conference will be at 1:30am local time and most of us are expecting an all night flurry of activity. OPEC meetings still have a habit of keeping us journos on our toes.