If you’ve been watching the oil market half as closely as Wall Street in general you’ve seen something rather remarkable happening this week. At the end of last month, OPEC finally decided that they were getting beaten badly enough with scandalously low oil prices and decided to jointly cut production. Since oil is always a significantly volatile global market, the system responded almost immediately, with oil climbing back up above the $50 per barrel mark for the first time in a couple of years. That helps out some of the member nations while not being high enough to significantly spike gas prices at the pump back in America.Gas prices locally went from $2.15 to about $2.40, so it's had a noticeable effect.
So why not trim the flow back even further and bump those prices higher still? One OPEC spokesperson was extremely open about their strategy. The low prices have largely pushed U.S. shale oil production into low gear. It’s simply not profitable to produce when the price is down in the forties or even thirties. But if the price gets up to a few bucks above sixty dollars per barrel it will be rich times in the shale fields again and we’ll bust the market open, leading to another round of depressed prices. The Nigerian petroleum minister was quite clear about it in an interview this week. (Bloomberg)But this isn't really new
This isn’t a declaration of war by OPEC or something we can really even criticize them for. It’s just business. But it’s worth keeping in mind that these nations aren’t stupid and they’ve been in the oil business for a long time. The emergence of the United States as a global leader in energy production has been terrible news for them and they want to do everything they can to keep our entry into the game limited. They’ve figured out that it still costs more to produce oil from shale than the sweet crude most of OPEC is still pumping. Holding the prices down to a particular level is the only way for them to continue making at least some money, when the alternative is to take disastrous losses if we flood the market.I used to say "Frack, baby, frack" at this point but now I say "Nuke, baby nuke."