[Schmuto]

We're here.

[angrybill]

I think the price of oil will remain in a state of flux but the mean annual avg will be much lower than $50.00 a barrel, at times in the 20's and very short periods at higher prices than 70.

I expect the Saudis will reduce output while Russia will fight to creat oil demand and higher prices in any way possible. I also expect a wealth of news supporting oil abundance and availability, increased reserves, and maybe even new oil deposit discoveries.

Lower oil prices really help China by allowing a boost in their economic growth, likewise higher prices significantly slow them down.

Higher oil prices really help Russia a lot because it's pretty much their only export. If prices remain low then Russia is really, really hurt. Now think about the Pipeline from Russia into Europe via Ukraine. Russia turned off the pipeline but they really want it back on ASAP. It's Ukraine that stalling Russia, and now Russia is in a pickle and will most likely look to create other pipelines and larger distributions out of Russia, or destory pipelines and create demand, but wait they already tried that! Againist Georgia and it didn't work.

I think there is a serious manipulation on oil to subdue countries growth and it's like trying to control the weather. Bad and unpredicable outcomes.

Now I'll go read your link.

[Carlhole]

Fatih Birol, while speaking to The CFR, recommended a tax policy that maintains $100 oil. I'd be in favor of that.

[yesplease]

I think that it should be phased in for businesses that are too exposed to high oil/fuel prices. They shouldn't be exempt, but they should have more time to adjust since most oil use is relatively frivolous and that's what should be targeted first.

[Ibon]

What is to stop oil from dropping once again to 25 dollars a barrel if we experience a further contraction of the global economy in 2009?

[yesplease]

OPEC cuts. So far they've been enough to bump the price out of the $30/bbl range w/ ~4-5mbpd in announced cuts. Depending on how the global recession goes, that may be enough, or they may need to cut more production to keep up w/ the reduction in consumption. The current price is ~$35/bbl equivalent given the dollar index now compared to it's historical average, so we aren't out of line w/ the prices seen before the recent run up.

[jamest]

What is to stop oil from dropping once again to 25 dollars a barrel if we experience a further contraction of the global economy in 2009?

OPEC cuts. So far they've been enough to bump the price out of the $30/bbl range w/ ~4-5mbpd in announced cuts. Depending on how the global recession goes, that may be enough, or they may need to cut more production to keep up w/ the reduction in consumption. The current price is ~$35/bbl equivalent given the dollar index now compared to it's historical average, so we aren't out of line w/ the prices seen before the recent run up.

Not necessarily. History demonstrates that there is a limit to how much OPEC is willing or able to cut production, and how effective they can be. Opec attempted to prop up the oil price during the recession of the early 1980's to the mid $20's, but the effort failed when Saudi Arabia was forced to reduce its production to an unsustainable level of about 1 mmbopd. Saudi Arabia finally abandoned this effort in 1986, and increased their production to 7 mmbopd, thus forcing the price down to about $10. The price stayed well below $20 for the following 13 years, with minor breaks due to the Persian Gulf war (1990) and rapid expansion of the Asian economies (1996-1997).

Many analysts believe that the current round of announced cuts of 4-5 mmbopd have had very little or no effect on price, as demand appears to be falling more rapidly than the cuts. Rather, the recent increase in price from the mid 30's to the low 40's is more likely attributable to Middle East conflict (again), and is probably transient. It appears that production cuts would have to be considerably larger than they have been in order to create a sustainable floor price that will provide an economic incentive for energy development and conservation. It is unlikely that Opec is any more capable of doing this than it was 20 years ago.

The most effective way to establish a floor price, which is desperately needed for several reasons, is for the importing nations to purchase oil when the price is low and to place it in a tactical or commercial petroleum reserve, similar to the strategic petroleum reserve. China has started doing this, but on a scale that is too small to impact price.

I proposed this in a separate thread, but it only drew some rather silly responses from Monte, to which I saw no point in replying.

[yesplease]

As history has shown it really depends on whether OPEC as a whole can cut production. Like you mentioned if SA tries to go it alone they'll probably fail and have to flood the market again, so it depends on whether or not OPEC as a whole w/ their ~30mbpd of production can as a whole drop down to, using the last drop in oil consumption as a reference, ~20mbpd. If they can, they stand a good chance keeping prices up, even through a world recession. But like ya said, if they all don't play ball, prices will once again drop in the gutter.

I think that a separate reserve for crucial services would be a great idea, and in the meantime we should adopt the same higher fuel taxes other countries have in order to encourage more efficient oil use, possible even use of EVs if the tax is high enough.

Edited for errors in OPEC production figures

[TonyPrep]

Many analysts believe that the current round of announced cuts of 4-5 mmbopd have had very little or no effect on price, as demand appears to be falling more rapidly than the cuts.

According to the latest STEO estimate, demand (aka consumption) is doing anything but falling. Also, according to the estimates, it is very difficult to see evidence of significant cuts from OPEC over the last few months.

[Ludi]

I think that it should be phased in for businesses that are too exposed to high oil/fuel prices. They shouldn't be exempt, but they should have more time to adjust since most oil use is relatively frivolous and that's what should be targeted first.

I'm wondering what accommodation will be made for those who depend on "frivolous" oil use for their livelihoods. Yesplease, I find the last sentence in your post to be a little confusing. Should these businesses be "targeted first" or should they be "have more time"? Can you clarify?

Thanks.

[yesplease]

Frivolous use would mostly be in passenger vehicles. Since car companies can demonstrably (France, etc...) make more efficient vehicles, there wouldn't be a loss of jobs in that respect. Other uses that are oil intensive, but relatively necessary, like trucking, could be scaled up relatively slowly compared to use for passenger vehicles. The rate of change in different applications could even be used to encourage more efficient use. For instance increasing the cost of distillate for rail less than the increase in cost of distillate for trucking would result in more freight sent via rail and greater energy efficiency for freight.

[yesplease]

Also, according to the estimates, it is very difficult to see evidence of significant cuts from OPEC over the last few months.

OPEC cut oil production from 31.95mbpd in July to 30.07mbpd in December, for a reduction of 1.88mbpd. They appear to be cutting oil production slowly but steadily. Predictably, the "Other Liquids" production from them is up by .08mbpd since it isn't included in production quotas IIRC. Oil consumption was pretty high, probably because refineries and China stocked up on it while prices were in the $30/bbl range.