Is OPEC in a Death Spiral?

OPEC has signed its death warrant.

Most people do not understand what is going on with the oil markets and the huge risk OPEC is taking.

Just as a quick review, OPEC made a bet in November 2014 that by holding production levels high, they could drive down the price of crude oil, and in turn drive American frackers out of business. Two years later they gave up because the protracted decline in oil prices almost bankrupted OPEC countries. The Saudi Arabian oil minister especially needed prices to rise because his country would be selling an interest in its state-owned oil company.

The goal now is to reduce production and over time, increase the price of oil. The price of oil now stands at about $56 for Brent crude. OPEC members would like to see it go to $60 to $65 before the Saudi offering. In doing this it seems OPEC has made a crucial mistake that may well end the cartel.

Let me try and explain what I think is going to happen. For the price of oil to go up, the supply has to decline and/or demand has to outstrip supply. If the consumption of oil is 2 million barrels a day and the oil exporting countries are pumping 2 million, then prices will be stable. What happened if the US fracking industry pushes the production to 2.1 million barrels? We have an oversupply of crude in the market. OPEC then has to make a decision whether to let the oversupply stand, which in turn, lowers the price, or decrease production. This second possibility could bring about the death of OPEC.

If the second choice is to hold prices as they are, OPEC countries will have to reduce their production in order to keep the market price stable. Every time the frackers increase production, OPEC then will have to reduce production to maintain price levels. Reducing production also reduces revenue; one can see this could be a death spiral.

Thus by lowering production, OPEC nations will receive less income. Declining revenue will create massive unrest in the OPEC countries because they will not be able to support their people with reduced revenues.

I believe that under the Trump administration, America will become the largest exporting nation of crude oil. Developing our energy resources will be the fastest way to grow our economy and create millions of new and good long-term paying jobs. If one looks at the entire American economy, what sector of our economy could produce so many good paying jobs?

Many companies have announced that they will be building new plants in the United States and will be using robotics to replace humans in production. Technology is a beautiful thing, but one of the realities is that technology is replacing people all over the world.

FoxComm, the contract manufacturer for Apple, recently announced that it was replacing 50,000 jobs in one of their Chinese factories with robots. The logic is that a robot can do the repetitive work of humans and be more reliable.

To meet new demand, America will need to build more pipelines, refineries, chemical plants, wind, solar, and nuclear systems, as well as alternative sources of clean energy. Add to the demand of energy development the rebuilding of our transportation infrastructure. New roads, bridges, tunnels and airports will have the potential to put millions to work.

More people working will increase the demand for American energy. With rising demand in both America and the rest of the world, we will have to expand our markets for American energy.

So I come back to the headline. If America can develop its energy, many things will happen. First and foremost America will be energy independent and second and almost as important, every barrel we produce means the possibility that OPEC will have to cut its production while trying to hold a stable price.

In November 2014 OPEC sought to destroy the American oil industry, and now we are in a position to destroy OPEC.

Tags

Dan Perkins

Dan Perkins is a current events commentator who writes for several blogs including Constitution.com, thehill.com, the dailycaller.com, and thedailysurge.com among others. He is the author of the trilogy on radical Islamic terrorism against the United States called the Brotherhood of the Red Nile. Dan can be heard on W4CY radio.com on Tuesdays at 8 PM Eastern.

Please leave your comments below