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Wednesday, February 11, 2015

Do not belive in miracles, especially those promised by cartelists

Everybody - well, almost everybody - in the world today seems to enjoy the lower prices for oil.  After a long winter, spring seems to finally come to our land and into our homes (OK, also in our cars). 
But is it really spring and, if so, it is here to stay? Not really. 
The prices for the most needed commodity which is represented by oil is determined, as a for other commodities, by the offer and demand for the ”black gold”.  Demand has been soaring all over the world for the last 50 years and more, whilst offer also increased, although not at the same pace and, importantly, not at the same costs for processing, transportation and processing. When demands exceeds the available offer, prices can only spike and no law can oppose to this basic law of the economics.  
The equation is not in fact that simple. The problem for the purchasers is aggravated by the fact that they are divided in different locations and with different interests.  They have to compete for oil or they will stop moving.  In the last decade a third way emerged, in the shape of alternative (mostly renewable) sources of supply, in huge quantities and available everywhere.  Available but not so easy to extract and to store, when speaking of the new electricity generation sources.  
The oil, on the other hand, is not in the hands and control of a single entity, be it a state or a multi-national company. There are at least a dozen major producing countries in the worlds, with oil in various quantities, qualities and possibilities to ship overseas. Although one might think that the oil market is global in size, it is regional at most, even with the advent of the super-tankers, capable of moving large quantities of crude at long distances. 
For years, most of the world oil producers, including the countries with the largest reserves, learned that they are stronger if they stay united.  They are different, have different interests and sometimes wage war to each other, for the control of the oil reserves, of course (see Iran and Irak, for instance). But they stay together and in order to ensure that this friendship holds, they put in writing their engagement, in the form of the Organization of the Petroleum Exporting Countries (OPEC). 
What is OPEC? Apparently, a honorable alliance of states, even if some of the members are not that honorable. It is headquartered in the peaceful Vienna, in the heart of Europe and its meetings are attended by elegant gentlemen, getting down from luxurious limousines. 
Appearance is deceiving in this case: in spite of the face shown to the world, OPEC is in fact a cartel: an explicit agreement among producers to control the level of the prices above their competitive level, set by demand and offer, through the control of the output. It is the largest cartel ever seen in the history of the humanity, with a very long duration and, worst of all, it is meant to stay around for a while. 
We all know that cartels are bad, because they alter the rule of thumb of the market economy and, because of this, they are prohibited almost anywhere in the world, except, perhaps, countries such as Cuba or North Korea, where there is not much market economy either. 
What happens and why the nice guys in suits meeting almost in the open in Vienna on a regular basis are not immediately apprehended by the police and thrown to jail? Well, the nice guys do bear with them the strongest weapon against the justice: diplomatic passports. They are all high ranking state dignitaries in their respective countries and out-of-touch of the due prosecution in their respect. Their actions are taken in the name of the states they represent and the immunity they benefit is known in the legal doctrine as the ”sovereign  state immunity”.  It is pretty much the same doctrine which shields for decades bloody or just crook heads of state, whilst these are in position.  Is it right? Definitely, it is not. A wrongdoing remains a wrongdoing, whoever is committing it and under what cover. Nice clothes do not turn bastards into angels and not even into true gentlemen. 
The nest of the cartel, hosted by Vienna, is the ultimate hypocrisy of this cartel. Vienna is the host of several reputable international organizations, from the United Nations to the International Atomic Energy Agency.  Like a predator, OPEC mimics the surroundings in an attempt to deceived the pray. 
So, do not forget that the decreases of the oil prices since December 2014 are not the natural result of market forces but the effect of the blunt decision of a cartel. And cartels never make gifts and never give up on their primary goal, which is to keep prices high and ensure hefty benefits to the participants. 
In this specific case, the OPEC members want nothing more to pull the carpet from the feet of what emerge as competitors to their market dominance: the alternative sources of gas and oil (such as the shale gas or the deep-waters oil alongside the shores of the South America), the new green energies (wind, solar, hydro) and the new fuel-saving technologies.  The OPEC members are pragmatic businessmen but they realized that too much greed, in the context of a long-lasting crisis, which left the world economy weakened, will eventually put at serious risk their supremacy. ”Wisely”, they decided to press the breaks and to show the world their smiling faces, which seem to say: ”we are your friends and partners and you should not worry or waste your time and money in finding new sources of energy or in research for a more efficient use of the fossil fuels”. The wave of the technology changes swept the world more than once - the steam engine, at least, died before being able to accomplish its full potential - and the OPEC members have no wish to follow on this path. 
Taking into account all these considerations, no rational person should be fooled by the apparently friendly approach of OPEC. A cartel remains a cartel, whatever is doing and even a reduction in prices, decided in concert and not by individual decision, is only made in order to strengthen the position of the cartel and to allow it to raise the prices again as soon as possible (at the cartel will), thus recovering anything which apparently gave up whilst being ”friendly”. 
OPEC members are very much aware that their market power - and the efficiency of OPEC, as a collective mechanism of setting world prices for the crude - will only exist as long as their - only - product remains in high demand and does not have feasible alternatives.  A cartel of the horses growers could enjoy a huge power 150 years ago but it would raise nothing than eyebrows or smiles today, with no impact on the economy and our life. OPEC members would like to avoid the faith of those who knew only how to grow horses or the faith of those who invested heavily in coal, at a time when this fuel seemed to rule the world for the next 100 years (until 1920-1930). It did not. 
This is why, remain wary and vigilant and prepare for the moment when, inevitably, the honorable OPEC members shall raise the price bar again, by limiting their output.  They will be able to do this - and they will do it for certain - when the investments in shale gas, in the renewable energy or nuclear energy would have faded to levels that it would make these investments unsustainable. We should not forget that investments in oil extraction, especially, have a lot of sunk costs (sometimes, literally) and a shock induced by an abrupt loss of attractiveness may give these alternative sources and new technology a blow difficult to recover later on. 
So, beware of cartelists, even when they bring gifts.  This used to be said in the context of the Trojan horse, which made the great Troja fall to its assailants, but it is perfectly applicable here.