OPEC Fights for $100 Crude

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The Organization of Petroleum Exporting Countries (OPEC) is moving towards supporting $100 oil. Some of its members have already started to lobby aggressively to get the price to that level. There are a number of reasons why, but the most immediate one is the rapid decline in the value of the dollar which hurts the treasury receipts of cartel members.

"The U.S. currency's weakness means the 'real price' of oil is about $20 less than current levels," said Venezuelan Energy and Oil Minister Rafael Ramirez after yesterday's meeting of OPEC in Vienna, according to Bloomberg. Venezuela is a sworn enemy of the United States, so the comments may have been aimed, in part, at America, but the South American nation has much broader goals. Its socialized economy relies on the government's ability to provide capital to people and businesses within its borders. That is how President Hugo Chavez got elected. Oil receipts are critical to him retaining his position

The other members of OPEC may not be quite so vocal, but the dollar continues to lose ground against other currencies, and depending on what actions the Federal Reserve takes to remedy a slow U.S. economy, the greenback could lose much more of its value.
What could become of the oil crisis shows how deeply and unfortunately trade, currency, and commodity issues are linked. The U.S. may be able to settle its trade differences with China, although that is not terribly likely. America may be able to stimulate its economy. The Treasury and Fed may be able to flood the market with dollars and put in place another round of monetary easing. Most of these actions would weaken the dollar and the currency could remain weak for months. If the past is any indication of what the future holds and if the U.S. economy remains moribund, then the dollar will likely drop. The dollar has fallen from $1.20 against the yen less than three years ago to its current level of 81 cents.

The struggle among policy decisions has become frustratingly complex as American unemployment grows and GDP flattens. Oil at $100 would be very damaging to a U.S. recovery. It would drive up not only the cost of gasoline and heating oil, but petrochemicals as well. It could pressure inflation in China which is now the largest net importer of crude in the world. That would increase the likelihood that the People's Republic would have to get more for its exported goods, an issue which is already a major irritant to its trade partners.

Oil at $100 becomes more likely by the day as the drop in the dollar continues. But, the web of trade and currency effects is nearly impossible to untangle. U.S. trade and monetary policy are being controlled by an American government which is between Scylla and Charybdis. Almost every route away from harm leads to another path which is also in harm's way.

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Douglas A. McIntyre

Douglas McIntyre is editor of 24/7 Wall St.

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