Saudi Bid For ‘QE3′ Quashed By OPEC
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Saudi Bid For ‘QE3′ Quashed By OPEC Discord

Wednesday’s disastrous OPEC meeting shows that the cartel has splintered into two. The Gulf states of Saudi Arabia, Kuwait, Qatar and UAE were pushing to boost OPEC output by 1.5 million barrels per day to 30.3 bpd in an effort to bring down oil prices. The other faction–Algeria, Angola, Venezuela, Iran, Libya and Ecuador–voted against adding supply.

The goal of the Saudi bloc, explains economist Ed Yardeni, was to help the global economy with a kind of Q.E. 3 that would pick up when the Federal Reserve’s liquidity boosting efforts end this month. “Their version of quantitative easing is to provide additional liquidity to the global economy by pumping more oil to bring down crude prices,” wrote Yardeni yesterday.

Guess that means the Iranians and Venezuelans have had enough of this quantitative easing stuff, or they’re just hoping to maximize revenue before the western economy plunges back into the abyss.

Leaving the meeting Saudi Arabian Oil Minister Ali Al-Naimi called it “one of the worst meetings we have ever had.” He said that despite the disagreement, Saudi Arabia would unilaterally meet world oil needs. “Let the buyers come and we will supply them with what they want, whatever they need,” Al-Naimi said, according to Platts.

Unilateral action by Saudi Arabia could mean that for all intents and purposes the Saudis are now a cartel of one.

Al-Naimi said as much, asserting that within OPEC only the Kingdom has meaningful excess capacity that it could bring online to meet demand. “Look, we have spare capacity there, it is already there,” he said, according to Platts. “The other six don’t really have the capacity anyway.”

Therein lies the conflict that could bring the end of OPEC. The cartel was created to stablize oil prices when there was a glut of supply. By agreeing to limit their production they endeavored to maximize both long-term demand for oil and short-term price. Cartels are powerful when there’s a supply glut. But now that the world is addicted to oil and all the big producers except Saudi Arabia are producing at close to full capacity, what’s the point of a cartel? Even at these high prices there’s been very little worldwide demand destruction. From the perspective of cash-strapped Iraq and Venezuela, why should they give away upside if they don’t have to?

Well, one reason is that high oil prices are a very real drag on the global economy. A double-dip recession in the U.S. or a marked slowdown in China could cut oil demand–which in the long run would prevent the OPEC nations from maximizing revenue. At least in theory.

It’s nice to think of Saudi supply-boosting efforts as a kind of Q.E.3, but I don’t think it can really be considered anything of the sort. Say the Saudis were able to reduce oil prices by $20 a barrel. What would the effect be? At current world demand of 85 million bpd, or 31 billion barrels per year, a $20 discount would save $620 billion for the world. For the U.S. it would knock about $140 billion off our annual oil bill. That’s something, but it pales next to all the other economic stimulus that Washington has already tried.

The political significance seems greater than the financial significance. The message from the disastrous OPEC meeting is clear. The Saudis and their pals want to do what they can to maintain stability and help the world economy from slipping back into the abyss (if only because they have a lot to lose if it does). The rest of the gang, well at least Venezuela, Iran and Ecuador, wouldn’t mind at all to see the collapse of the west.

OPEC’s not dead yet. But to keep it alive, the Saudis might have to use their muscle — significantly boost output and gut oil prices low enough that it inflicts enough financial pain on its wayward brethren to get them back in line. For the sake of summer driving season, let’s hope they try.