Opec oil cartel falls apart, higher oil prices risk another recession

The latest Opec oil summit in Vienna was the worst in the history of the organization, according to Gulf participants. Opec split down the middle over the need for increased oil production and could not reach a decision on anything.

Short of unilateral production increases by the Gulf States, which is being immediately considered, this seems to doom the world to higher oil prices than its weak economy can tolerate. Morgan Stanley sees $130-a-barrel oil before the end of the year.

2008 again?

If we look back to the pre-crisis oil surge to $147-a-barrel in July 2008 then we should not be too surprised if the result is no different this time. Then the world plunged into the longest recession since the Great Depression and the S&P 500 index plunged to 666.

That is why the Saudi Arabians have  been calling for increased oil production by Opec. The kingdom naturally benefits from high oil prices but recognizes that bankrupting your best customers by overcharging is seldom good business practice.

Their opponents led by Iran, although not formally acknowledging any such leadership, take a more short-term view and in the case of Iran would like to punish the West for their trade sanctions.

Higher oil prices than could be achieved by Opec operating as an effective cartel therefore look inevitable, and so too will be the inevitable economic pain that follows for the oil consuming nations.

This is all a bit back to the 1970s and the heyday of Opec’s power, only then it acted in unison rather than disunity.  The high oil prices it delivered in the late 70s were a huge boost to the development of the oil producing nations.

Arab unrest

The oil states would certainly like to keep oil prices relatively high to pay for social and economic programs to assauge populations mobilized by the Arab uprisings of this year. But the world has only so recently escaped from the jaws of the Great Recession that sent oil prices down to $33 in December 2008, not something oil producers wish to see repeated.

From the perspective of Opec members there is clearly wisdom in a balanced approach, maintaining higher levels of production at higher prices. However, political disunity means that shoving prices up and driving the world into recession is the policy of the moment.

That cannot be good news for a world economy that is already battling on too many fronts to keep a fragile recovery afloat. As in July 2008 it is the oil price that is the most obvious tipping factor into the next stage of the economic downturn, or double dip recession.

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