Tuesday, July 01, 2008

Saudi King: Screw You, Pay Up

I've been thinking about a post to explain Economics 101 to newsmen and women regarding oil prices. This news post on FoxNews.com put me over the top.

Saudi King: Get Used to High Oil Prices

Tuesday, July 01, 2008

Saudi Arabia's King Abdullah told oil consumers Tuesday that they should get used to high prices and not blame the country for the spike in the price of crude, the Agence France-Presse news agency reported.

"Consumer countries have to adapt to the prices and the mechanisms of the market," the king said in an interview published Tuesday in Kuwaiti daily Al-Siyassah.

Abdullah's comments came as the price of oil jumped past $143 a barrel for the first time.

The king contends that speculators are to blame for the rising costs, a claim that has been denied by the International Energy Agency, AFP reported.

"Often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions," the IEA told AFP.

OK, here's Econ 101.

Oil prices are NOT being driven up by speculators. Oil prices are high for one reason: OPEC. OPEC is a cartel. In the USA, cartels are illegal (well, except for MLB and the NFL and...) So when traders on the exchanges bid on oil, there is one major supplier with the same price. OPEC sets prices for ALL of its members, and sets production quotas for members. Together, OPEC members produce about 40% of the world's oil supply. This means that, if I agree to pay $130 for a barrel of oil, all OPEC members sell at this price. I can't get a separate bid from Saudi Arabia, Iran, Iraq, Venezuela, etc. In the past, some of the OPEC members would "cheat" on their production quotas, but they were punished by other OPEC members.

If there was truly a free market in oil, I could go to the market and get a price from all of the different nations that produce oil. If the current price was $130, I could probably find someone who would offer it at $129. That, in turn, would start a bidding war (downward), resulting in a lower price. The price would stabilize when the last barrel of oil available was sold to the last bidder. This usually results in a price that reflects costs + a reasonable profit margin.

Today, if I offer $129 for oil that's selling at $130, none of the OPEC countries are allowed to sell to me at $129. Since they control such a high percentage of oil output, those suppliers that are not members of OPEC have no incentive to sell at any price lower than the "set" price, or OPEC price. They'll get the OPEC price.

To call this "an open market", "a free market'', or "the mechanisms of the market" is a bunch of baloney.

Solution: We should tell all OPEC countries that we will bomb the next OPEC meeting, killing all oil ministers. We will then assassinate all future oil ministers and bomb OPEC meetings until they dissolve OPEC. You think I'm kidding? Well-placed smart-bombs in the camel tents of a few Saudi and Iranian goat-lovers would cause them to get our religion quickly. I'm deadly serious. These SOB's hide behind statements like the one above, taking billions from us, and then tell us it's our fault. I've had enough of this garbage.

The price to drill and recover oil in the middle east is somewhere less than $20/barrel. I would pay $40/bbl for this oil. They'd still be zillionaires, but we would be a lot better off.

Oh, by the way, lest you think I'm kidding, my REAL proposal is to nuke the mideast, take it over, and sell it to the highest bidder (Exxon and Shell would pay reasonable prices for oil leases there). As my brother would say, "What are all of those arabs doing camped out above our oil?"

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