The Saudis would like some handouts, please.

OilHere’s a rich idea reported by the New York Times: Pay oil producers for not producing oil.  That’s right.  Saudi Arabia wants “rich nations” to pay oil producers to help wean themselves from their dependency on oil.  That is- oil exports.  It’s just like paying farmers not to plant, right?  Wrong. In this case, oil producers still sell what the market demands, it’s just that since the market will be demanding less, OPEC and the like will get less.  According to the article, the Saudis have in the past gummed up the works on climate change protocols because of other nations’ refusal to accede to this sort of extortion.

Do the Saudis have a real problem?  Yes.  They and other large oil producers like Libya lack a sufficiently diversified economy, such that when oil prices dip, everyone suffers.  This is known as Dutch Disease, and oil exports are right to be worried about it.  Dutch disease happens because the demand of oil alone drives up national currencies, making all other industries in that country uncompetitive by price.

So here are a few questions:

  1. Can oil producers wean themselves off of oil without economic assistance?  After all, they’re taking in all of this money.  Can’t they use some of it to develop other industries?  It seems Dubai has been somewhat successful at this.
  2. Would economic assistance actually help?  If consuming countries gave them more money to compensate for losses of oil revenue, would producers just become dependent on the subsidy?
  3. Isn’t there a broader picture here surrounding to the West’s relationship to the Middle East?  Doesn’t good will count for anything?  And don’t we need some of that good will in that part of the world?

Dutch Disease requires complex solutions.  Simply providing a subsidy won’t do the job.  In fact, providing a subsidy could in fact prop up the national currency and compound problems.

And then there’s the fact that most of us feel as though we’ve been held over a barrel by some of the countries in question, and would like to have done with entanglements in the middle east.  Oil or no, however, the people in those countries are not going away.  They and we need an equitable way to live together in the future.

What the heck is a target price?

You often hear analysts say that they have a particular target price for a stock or a commodity.  That means that in their heads they expect the value of that thing to hit that price over a certain period of time.  But now we have OPEC saying that they have a target price of $75 per barrel of oil.


One of two things is the case here.  Either OPEC has no price control, or they are simply lying, and they really just want the price as high as it will go, as it did go in the summer.  I tend to think both.  For one thing, the statement may be a sap to Iran and Venezuela, who have been publicly pushing for a cut in order to get prices back up to stabilize their own oil-based economies.

What seems to have happened with oil is that the speculators had their day both ways.  First they drove the price up, and then they drove it down.  They were helped a little bit by demand having first climbed, and then fallen. Once prices were clearly dropping, they piled on and just drove them down further.

So where is OPEC’s role in setting the price?  How many millions of barrels will they have to cut in order to have a significant impact on prices?  The general economic answer would be that they would have to stop supplying the world with enough oil to meet current demand, a shrinking target, as we speak.

So why have prices stablized at $50 or so?  Who can say?  Perhaps traders believe that demand has leveled off and is now stable.  Perhaps there is simply a consensus view as to what production and the econony will be 90 days from now, and it is reflected in that price.

Two things have happened this weekend that should make Monday trading very interesting.  First, Black Friday has come and gone.  This will give some indication as to the state of U.S. retail, and hence a good portion of the economy.  Second, OPEC has said that they will not cut current production levels.

If Black Friday turns out to have run red, then we may well see yet a larger drop in demand, based on lower production.  Butt his depends on whether or not producers have already anticipated a miserable Christmas season.  Even so, Monday will be very interesting.  When you see reports about this weekend’s retail sales, think of oil.