Does OPEC See A Recession?

The people at OPEC are funny. They see no reason to cut oil prices. Their analysis is that global economic growth is slowing which will cut demand for crude. So, why drop prices?

According to Reuters "OPEC, in its December Monthly Oil Market Report, estimated world economies will grow by 4.8 percent next year, down from 5.2 percent in 2007, and said there were "considerable downside risks" to the outlook."

It is the kind of tortured logic that the cartel can use when it has the oil consuming nations over a barrel. But, it is only partially true.

There may be a slowing of oil consumption in the US and Europe, but it is almost certain that China will continue to use up crude at an alarming rate as it does what it can to keep growth at a 10% level. The government there will continue to underwrite oil costs so that gas and diesel will stay cheap. In other words, businesses and consumers in China will not feel the pinch of higher oil costs. Normal supply and demand metrics will not apply there.

And, there is amble evidence that big oil producers like Saudi Arabia and Mexico are using more of the oil they produce because of growth in their own countries. Rising car and truck ownership married with big build-outs in infrastructure are already eating into the portion of production that they export as opposed to what they use at home.

There may be a recession, but it will not cut demand for crude. Rather, the demand for crude will be part of the cause.

Douglas A. McIntyre