Tags: oil | price | opec | floor

No Floor for Oil in Sight

By Greg Brown   |   Thursday, 23 Oct 2008 10:29 AM

When economies slow and people buy less of a commodity, economists call that "demand destruction."

For oil, it’s starting to look more like demand annihilation.

Prices fell to the mid-$60 range this week and keep sliding on any twinge of economic doubt in the developed world.

Falling oil could destabilize countries both friendly and not so friendly to the United States, including Iran, Venezuela, Russia, and across the fragile Middle East.

"The stocks are very high," OPEC’s president, Algerian energy minister Chakib Khelil, said this week.

"Some of us are not able to sell the crude. There is excess of crude not able to be absorbed by the market."

Nigeria and Libya now have set their national budgets in 2009 on the idea that oil will average $45 a barrel next year. Average is key; it could go lower still.

All this makes current OPEC meetings absolutely critical — and, simultaneously, irrelevant. The problem for commodities producers, as usual, is that there comes a point where producing is pointless. And it comes sooner for some compared to others.

For instance, Saudi Arabia, the world's biggest exporter, budgets for $40 and breaks even at under $30 a barrel. But neighboring United Arab Emirates needs oil at $40 to $45 to break even, and Qatar must have $55, according to Merrill Lynch estimates.

From there, things steadily get worse for OPEC members. The International Monetary Fund figures Russia needs $95 oil to make it work. Venezuela says it needs $60 oil, but privately analysts say $120 is the break point, thanks to President Hugo Chavez’s out-of-control social spending.

Iran is planning on $55 to $60 oil, although some analysts point to a break-even number more like $100. Iraq needs oil to stay even higher than $100, understandably.

Oil producers can't eat the oil they drill and export, so they'll keep selling and they’ll keep drilling. Meanwhile, OPEC has to talk about production cuts, or why have a cartel? But there is little they can do short-term to stop the horrendous slide.

Big non-OPEC players like Canada, Mexico, Norway, the United States, and, recently, Brazil are focused on their own energy security. They will go right ahead with their own oil drilling projects, compounding the supply problem.

Oil probably will keep falling, at least until an economic recovery is clearly under way in the United States, while global economies will slip after the United States and recover later, too. That’s months away, perhaps longer.

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When economies slow and people buy less of a commodity, economists call that "demand destruction." For oil, it’s starting to look more like demand annihilation. Prices fell to the mid-$60 range this week and keep sliding on any twinge of economic doubt in the developed...
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2008-29-23
 

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