There's a lot of consternation over the latest surge in oil prices, with growth in demand from China and India, speculative demand from commodities investors, the weak dollar and geopolitical concerns all taking turns being blamed for the price rise. In fact, OPEC is the more compelling villain. Oil prices simply cannot rise so sharply without OPEC's tacit approval, unless the Saudis are lying and they really do not have the capacity to increase production. More plausibly, OPEC is perfectly content to allow market demand to drive crude prices up and has simply refrained from adding to global supply to hold prices down. As a policy response, the U.S. should be subsidizing solar energy, not ethanol, and promoting nuclear power to undermine demand for crude oil.
While all the usual factors have contributed to the rise in oil prices, OPEC has the ability to offset them entirely if it were to increase production. Demand for crude oil is fairly inelastic in the short-term. As a result, small changes in the incremental supply can have a sizeable impact on market prices. For years, the Saudis countered the price hawks, including Iran and Venezuela, who always pushed for curtailing production to boost prices. The Saudis have the longest-lived reserves, so it was in their interest to keep prices from rising so much that consuming nations would seek alternative energy sources. It now appears that the Saudis have accepted the higher price demands of the hawks, or at least have not increased production enough to supply global demand without the surge in prices that has occurred.
Peak oil analysts believe that the Saudis are not increasing production because they simply don't have the capacity to do so. Some have argued that the Saudi Ghawar oil field, the most productive oil field in the world, is slowing down as it ages. However, geologists cite satellite data to suggest this field still has some ways to go. Moreover, the Saudis are investing billions in infrastructure to tap other parts of the field. There's no doubt Ghawar will slow down, but that day is not yet in sight. If production capacity is available, then the rise in prices is a direct result of a policy decision by OPEC, specifically the Saudis, even if they dont wish to make this known publicly.
If the Saudis are allowing oil prices rise so dramatically, then U.S. policy should be to promote alternatives. In the short-term, not much can be done that will make a significant difference. But solar is growing rapidly and with subsidies, could grow even faster. Similarly, policy should resume nuclear power construction, as a superior choice to coal-fired plants. Download this article in PDF Format
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Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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