OPEC, oil price and the US economy

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OPEC, oil price and the US economy

PARIS (ResourceInvestor.com) -- This week, in fact this year, has seen the equity markets fall and fall hard. Maybe not plunge back to the range they were in between the years 2002 and 2005, but the volatility and the worries over the economies of the U.S. and UK has taken the edge off current thoughts of growth.

In turn you would expect to see the price of oil tanking. Well, it has fallen, as low as $87 per barrel. But then again one year back it was at $49 per barrel, and no one was really talking about recession. So one can hardly call the figure of $87 a slump.

There are a number of reasons why the price of oil, when falling, may not keep pace with the falls in the OECD economies. Firstly, as we have seen in the run-up of prices since 2003, the major economies are much more efficient in using hydrocarbons than they once were. So if their economies fall, the impact will not be as volatile as it would have been back in the economic and oil price slumps of the 1980s, for example.

Secondly, the U.S. economy has genuinely been transferred into the hands of corporations and the elite who serve them. This has created a real dependency from the public on gasoline - and jet fuel - as thoughts of a public transportation system evaporated. Industry may be more efficient in the way it consumes oil and gas but the general public and transportation have no choice. Gas at $3 per gallon has not dampened consumption in the U.S., and if it stays around that price range it looks unlikely that this set of circumstances will change.

Then we have the powers of OPEC. The cartel is no longer solely focussed on the fortunes of the U.S. and the EU. They have large new markets opening up and they are determined to serve them. This means that if those markets continue to suck up extra oil - and if you believe the figures China’s demand rose around 12% in 2007 - then OPEC will be able to divert any surpluses to its new buyers.

Rather than raising production to get the price down to serve the interests of richer nations, OPEC will, as it has already shown, defend a higher price - maybe around $80 per barrel by cutting back production if they see fit. Secondly, those new clients are, in the main, inflating their economies through direct subsidies. There does not seem to be any reason that this will stop; in fact, if the price of oil eases to the mid-$80 level then consumption may even increase in China and India.

So the idea that falling equity markets can really short the price of oil for any period of time - and this column still expects to see some major short-term dips in the price in a year of volatility - does not seem to hold too much water. We are not going to see $45 per barrel again with a depression and the likelihood is that with energy prices staying high and OECD economies weakening