Sunday, December 7, 2008

Surprise announcement from OPEC? It will only worsen the situation

Read recently that OPEC is going to make a surprise announcement on Dec 17. There are only 2 surprise announcements I can think of:
  1. The cut in oil is double the estimates by "analysts"
  2. Russia or some other country has joined OPEC

Either case, will it help to shore up the oil price? Yes. Temporarily. However like I said earlier, they cannot fight against the world. US lost half a million jobs in November alone. Car makers are cutting models, closing plants. Shipping almost came to a standstill. Orders for the O&G industries are being canceled. Singapore itself might have the worse decline in her short history for the 1Q 2009.

In the best case scenario, this effect will only provide a base for the oil price. In the long term, the whole world will learn to wean themselves away from their addiction to oil. Public transport infrastructure will be improved to discourage car ownership. Green energy will be the new buzz word.

Withholding supply to shore up prices will only work when the consumers have the ability to pay. That's the key. Now with companies closing down every week, banks being seized every quarter, whatever OPEC can do will only hasten the downward spiral. In the end what happens? Consumers will consume less, and they will hasten their revenue decline.

For those countries which are very dependent on oil revenues, they will not obey the quota once they realised they are earning lesser and lesser by the week.

Actually, the best OPEC can do right now, is to trim their quotas accordingly with no big surprises. Allow the companies to survive this tough period so that the consumers will start to consume again. If this is not done, consumers will just stop consuming. Period.

Humans are adaptable, which is why economics science has been unable to do any accurate forecasting. Situations can change drastically within a span of a month. This is what this crisis has taught me.

OPEC should start to take heed of what's happening now. Old methods do not work anymore.

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