Members of OPEC unexpectedly failed to increase oil production after a tumultuous meeting in Vienna this week. The cartel, whose rules require unanimous consent to change production quotas, suffered a vicious spate of in-fighting between oil hawks, led by Venezuela, and those who wanted to increase production, led by Saudi Arabia.
OPEC’s failure came as a shock to world leaders who had expected an increase of about 1.5 million barrels per day. Increases in production were seen as necessary to help provide relief to the longest period of high prices since 2008 when oil prices spiked to nearly $150 dollars per barrel. The 2011 run-up, where prices have averaged in excess of $100 per barrel since April, has left economies across the globe sagging after struggling to recover from the worst recession since the 1930s.
In the background there is also growing concern among analysts that, without increases from OPEC, supply shortfalls or another brutal spate of demand reduction and resulting economic damage will occur. What is not being said, but is likely being thought, is that almost every recession since the 1970s has been preceded by a run-up in oil prices and that the current strain on economies caused by this second spate of high prices will put the world into a double-dip recession.
According to Peter Morici, a University of Maryland economist, this may well be the case for the US economy: “Too many dollars go abroad to purchase Middle East oil. This leaves U.S. businesses with too little demand to justify new investments and hiring, too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.”
In the end, energy is the world economy’s fuel. And when one source, as vast as important as oil has become, falls into rationing by shortage or by high price, the result is the same ‘” economic contraction.
So it should be little wonder that the Obama Administration is considering the emergency release of oil. “We believe we are in a situation where supply is not meeting demand,” said White House spokesman Jay Carney. The US Strategic Petroleum reserve, a store of about 750 million barrels of oil in the Gulf of Mexico region, “is designed to deal with disruptions in oil supplies,” said Carney to reporters on Wednesday, “and the President considers that an option going forward.”
If, for example, 1.5 million barrels per day are released from the reserve, high prices may be abated for a 500 day period. This may be enough to, temporarily, save the world from another economic shock. But what happens after those extra barrels are exhausted? If other energy sources are not produced, then we have come, economically, right back to the crisis point.
Meanwhile, in a symbolic break with OPEC, Saudi Arabia said it would continue to increase production in an attempt to satisfy world demand. It would seem that Saudi is doing all it can to keep the world supplied as it pushes to complete new projects to expand production and argues within OPEC for increased quotas. But OPEC’s failure to increase production and Saudi Arabia’s scrambling beg the question: is all this posturing simply due to the fact that these countries are unable to produce the kind of oil the world economy has become addicted to? Are the spare capacity figures, currently at around 3.5 million barrels per day, real? Or are they just a mirage? Is the current reality of world oil production similar to that of 2008: that the world is producing flat out and we still can’t meet demand?
If this is the case, the world is definitely heading toward a deepening crisis. Releases of emergency reserves may create a temporary stop-gap, but after those reserves are gone, the crisis comes back full tilt. And when it does those economies most able to shift away from oil and related fossil fuel dependence will be best positioned to emerge as world leaders. For those who want to keep their economic systems intact, it would be best to look at the models of Germany and Sweden, and not the loot and scoot free market models now being pushed by conservatives in America. They, who continue to cling to these depleting and environmentally dangerous fuels as soul energy sources and to the unjust dominance their dependence engenders, will ultimately fail as access becomes ever more difficult and the shortage, in the form of rationing or high prices, broadens.