Why OPEC Doesn't Mind Low Oil Prices

When most people think of the Organization of Petroleum-Exporting Countries ("OPEC"), they think of a cartel that tries to keep oil prices artificially high so that its members can continue to reap huge profits. For a few years now, however, oil prices have been relatively low due to lackluster demand caused by the recession in the U.S. and abroad. Indeed, many Americans have likely noticed that the price at the pump has been well below its 2008 highs. Is OPEC concerned that prices have remained so low? Not necessarily. In fact, it views low gas prices as a good thing, for now.

This counterintuitive notion was explained by energy industry analyst Stephen Schork this morning on CNBC's Squawk Box. Asked whether OPEC would allow oil prices to sink below $70, Schork responded:

OPEC is more concerned about long-term market share than they are about short-term price gains. Therefore with lower oil prices, what you're actually doing is raising the entry barrier for alternative fuels. I speak with OPEC regularly, and this is consistently their main concern is about the political shift of the sentiment in the U.S. especially towards alternative fuels. The cheaper you make OPEC oil, the harder you make it to bring alternative fuels to bring on. So no, I don't think OPEC is that concerned.

(The full video is below. He comes in around at 2:10 and begins talking OPEC at around 3:42.)

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This makes a lot of sense when you think about it. Back in 2005, a WIRED magazine article ached for higher gas prices, because they meant a renaissance for alternative fuel sources. The article concludes:

So what's a price-shocked, carbon-afflicted highway jockey to do? Keep driving. In fact, drive more. The longer gas stays expensive, the higher the chance we'll see alternatives. Put that pedal to the metal. And smile when you see a big black $3 or $4 out in front at the gas pump. Those innovators need all the encouragement they can get. Shale oil, uranium, sunlight - there's enough energy out there for a dozen planets. Where we'll all park is another matter.

OPEC essentially has the same logic, but wants the opposite result: low oil prices will keep down new technologies that might reduce consumers' need for gasoline.

A few new vehicles will be hitting the market this year that rely on less gas, including the Chevy Volt Plug-In hybrid and the Nissan Leaf electric car. Right now, their price tags are pretty high -- even with the lofty government subsidy. A quick analysis shows that you would have to drive around a hundred thousand miles per year to begin justify the Volt's high $41,000 price tag -- as long as gas prices stay low. If they climb above $5 per gallon, however, its total cost (including gas) suddenly becomes more competitive with the Toyota Corolla.

OPEC doesn't want that to happen. Every hybrid, plug-in, and electric vehicle sold means fewer gallons of oil burnt. Over the past few years, political pressures have been propping up the emerging market for autos that use little gasoline. But if the gas price remains low for too long, consumers may not embrace the new technology, because it's just so expensive. As a result, in the short term, lower gas prices might make OPEC very better off, if they kill a revolution for electric cars, fuel cell technology, or other novel approaches to engines needing little or no gasoline. Automakers will only flirt with these new vehicles as long as it looks like the market can flourish.

Is this good or bad for consumers? Analyzing it from a strictly economic perspective, it may depend on the time horizon. On one hand, if OPEC allows the lower market price to prevail, then consumers will have an easier time paying for their gasoline and more money to spend on other things. On the other hand, if green energy technologies are set back due to those low prices, then the lack of alternatives could result in a serious economic shock if gas prices spike in the future due to the oil supply running low. So in the short term, this is probably good. But in the long term, it could be a problem.