Will OPEC's Gambit Drive Oil Prices Higher?
Crude prices are already at levels that threaten the global economic recovery, according to some experts. WTI crude is near $110 a barrel, and Brent is near $123 a barrel. Prices have been rising for several months and the increase does not appear to be slowing.
The Saudis' choice to cut production raises the question of what kind of gambit OPEC is attempting. Certainly these comments from Saudi Arabia, OPEC's largest member by production, have a reasonable chance of raising crude prices. If the comments are supported by other OPEC members, the move is almost certain to do so.
The other possible motivation of OPEC nations to suggest that the global supply of oil is sufficient is that they genuinely believe it is. Under such circumstances, the cartel could actually hope to bring down crude prices to sustainable levels by showing that the current high prices are due to investor speculation and not economic fundamentals. Crude will sell off soon, they would argue, if the markets are convinced that OPEC comments are based on the truth.
The economies of the developed nations and other countries such as China, the largest net importer of oil, will run out of steam if oil prices stay at these high levels. Energy prices will eventually erode consumer activity and businesses' profit margins: It's hard to make a case that that would be good for global GDP.
Whichever motivation is OPEC's true one, the cartel's latest effort has a real chance of pushing oil prices even higher.