Greenspan Talks Oil

Last week, the G-7 met in Washington to discuss global fiscal policy and energy concerns. G-7 did not however address the oil situation as bluntly as Greenspan did. This recent barrage of rhetoric by the US and other leading industrial countries comes at a time when OPEC is considering adjusting its price per barrel window up from its current $22-$28 band. Greenspan's spew may be too little too late.

Oil is already trading well above the upper limit and has so for months. If the window is officially shifted upward, oil and gas futures will have an easy path to trade significantly higher, unleaded gasoline at the pump will average greater than $2 per gallon, possibly much more and global expansion will be suffocated. Raising oil prices is equivalent to OPEC levying a heavy tax on us...and without representation!

OPEC president, Purnomo Yusgiantoro of Indonesia, a strong supporter of raising the window, noted that the current window was established back in 2000 and in the last four years circumstances have drastically changed. Despite the fact that high oil prices will soon begin to slow the global economy, and trading is taking place well above the upper limit of the window, Yusgiantoro, along with the Venezuelan government, is pushing for the change. Why? Follow the money...

Indonesia stands to benefit greatly from rising prices as they are well under their OPEC instituted production quota. Raising the window and will cause a huge windfall of capital for Indonesia with out them having to pump a single ounce more oil than they are now. Venezuela, another strong proponent of this measure is in a similar production situation and will also find higher prices quite beneficial.

Indonesia is already a viable economic power supplying oil to herself. The effects of a raised window would not damage her economic standing, beside the capital influx, it may actually give her a competitive advantage as production cost would be relatively inexpensive compared to the rest of the civilized world.

The Venezuelan President, Hugo Chavez, a closet communist and anti American/anti capitalist, would love the chance to stifle American economic progress...A huge ego boost to a Castro confidant. Chavez, an outspoken critic of American style politics and economics welcomes the measure with open arms. If OPEC gets its way the global economy will suffer. But there is a glimmer of hope...

While Indonesia and Venezuela are gung-ho for raising the window, OPEC's most influential member, Saudi Arabia, has publicly contradicted the OPEC president and the measure. Saudi oil minister, Ali Naimi, has stated that the current window is acceptable and measures to increase it are unnecessary.

There is a big difference between the Saudi knowledge of the markets and other OPEC members. The Saudi's seem to understand the economic consequences of choking the world of oil. In the very short term, OPEC nations may benefit from raising the window, but in the long run, as economies slow, the ability to purchase their product may shrink---simple supply and demand...If you cannot afford it, you cannot buy it.

Of course the world will continue to consume oil regardless of price, we have little choice. But, the Saudi's know that once petroleum becomes too expensive, competing alternative fuels will become much more viable. If and when this happens-The oil product will become obsolete-and OPEC is out of business.

Raising prices too high will only push consumers to advance alternative fuels..the youngsters (Indonesia-Venezuela) do not understand the consequences of this measure. Don't get me wrong ...The Saudi's are not our best friends. They do, however, realize that our best interests sometimes match theirs. Let's hope the Saudi's flex some muscle on this one.

Luke Hodgens is the editor of
Powerhouse Profits a conservative investment newsletter. Click here to read more of his cogent analysis."