IF YOU THINK that the oil cartelists in Vienna on Tuesday did you a favor by agreeing to increase output by 500,000 barrels per day, think again. The increase is too trivial to have much of an impact on oil or gasoline prices. “Our message to the consumer is that we care. We are concerned, and that is why we increased production,” said Abdalla Salem El-Badri, OPEC’s secretary general.
OPEC might care, but not very much. The pledged increase in production is too trivial to do more than give OPEC a press release that it hopes will win it some goodwill in consuming countries. If you doubt that, look at the immediate market response to the announcement that more oil will be coming to market: Light, sweet crude for October delivery rose above $78 on the New York Mercantile Exchange, and the price of Brent crude also rose. Those are the generally accepted benchmarks used by analysts of oil prices to determine the direction of the market.
The real news is that despite the fact that oil prices have doubled in the past few years, the cartelists are sitting on a lot of excess capacity that could be put into production to bring prices down. Experts estimate that OPEC members have over 3 million barrels per day of excess capacity locked in. Add some of that oil to the market, and we might see a real effect on oil prices.
But don’t rush to buy that new SUV unless gasoline prices in the $3 range don’t worry you.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
