Everyone seems to be surprised that OPEC did not cut production last week. Not me though... That's because OPEC knows that they are walking a tight rope. For those people who think that just by witholding supply will drive up the price, well... I can say thank god you're not in the government sector dictating policy.
OPEC knows that if they cut too much too fast now, they will risk intiating a destruction of demand. Once initiated, it will be extremely difficult to arrest. Now companies are unable to get credit to produce goods. If the price of oil is artificially propped up, what will occur is that the companies will make even lesser goods, triggering a downward spiral in demand. OPEC might find themselves having a higher price, but selling less of the oil because of the drastic drop in demand.
OPEC could be waiting for the winter season to come to better judge the effects of removing the 1.5million barrels of oil. If prices continue to fall, which I expect they will, they will initiate a cut in December. Will this reduction help in the oil prices? No way... There's little you can do when there is a global recession. Can you work against the whole world? I don't think so. By cutting the production, they're only causing themselves to earn less revenue.
Based on what I can gather, it seems that the household savings rate for the United States has shot up from 0.4% in 2007 to 1.8% in 2008! Just this small jump is enough to throw the global economy into a recession. And guess what? The household savings rate will still be rising. The demand destruction is real! No longer can other countries rely on the good old US to keep buying.
And now, they have absolutely no solution because they are unwilling to find ways to excite domestic consumption.
Long ago, I've liken this current crisis similar to the Great Depression. My view is still the same. What's the great depression in essence? A global recession. Sounds familiar?
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