Exxonomics 101 : OPEC CHOKING ON THEIR OWN OIL? CAUGH CAUGH!

by Howard Melamed

Several months ago I discussed with my colleagues that the price of oil will soon drop drastically due to the fact that the high costs will soon force the world into a recession.  I was right.   With oil hitting new highs the OPEC scrooges  were quick to hold their head up while blurting insults at the United States.   Iran, Russia and Venezuela were especial heinous.    These three stooges had a plan.  We will get 300 per barrel for our oil and we will sell it not to the United States…who needs them, but to China.  After all,  China to them was the emerging marketplace.  

This miscalculation not only forced the price of oil up, but got us into this deeper than expected recession.  It was not the banking problems, surely you can see, but the oil problem that caused all of this.  Being greedy has been nothing new with those that think they hold the power.   Then the American consumer, the real world power,  decided not to buy gasoline.  It was quite simple.  The cost was too much, so we will drive less, use less and therefore spend less.  

Oops.  

Never expected this one, says the scrooges.  Well then, to hell with the US we will sell the oil to China.   Then the US economy tanked.  With China’s #1 trading partner ( more than 50% of the exports go to the USA) not being able to buy those cheap dangerous to children toys lead and melamine baby food and of course the polluted fish ( we can’t forget about the fish),  there was no need to buy more oil.  In fact, they needed to cut back.  

At the same time  China started to default on contracts to scrap metal companies in the United States as  they don’t need more metal if they are doing less business.  They are building less, buying less, and therefore the number one driving force to price increases around the world, is out of gas, pardon the pun.   That is why oil, copper, aluminum and yes even wheat has come down to levels 1/3 of what they were a few months ago.   You see China never really negotiated prices on these items.  They just bought. The price rose as more and more suppliers around the world decided to unload their products to a sucker customer who never asked for a lower price.  China at the same time, used the raw materials that they paid more for , and subsidized the finished products as they flooded the US and Europe . 

One friend of mine who used to have a thriving manufacturing business in Pompano beach,  told me that the cost of the final product landed here from China was more than what he paid for the raw materials that both Chinese and him buy at the same price.  350 employees later,  he confirmed this fact as JC Penny, Sears and others that used to buy from him now bought the dumped goods.   So the world recession according to Howard has been caused by two important factors connected at the hip.  China dumping forcing businesses to close , and China being the dumping ground for expensive commodities including oil.   Reality now sets in.   Since China is effectively out of the picture, the number one purchasing country in the world remains the United States, which is really not doing a great job at purchasing these days.    

OPEC was trying to raise the price artificially again by telling its members to simply cut back on production and therefore surely the supply and demand would take over and prices would rise.  What happens if you plan a picnic and it starts to rain?   They lowered their production ( or so they said) and the price is still dropping.  So much for the theory of supply and demand.   To make matters worse for them  ( and glad to do so) the OPEC nations spending habits were all based on the price of oil being at $70 or above.   In fact our friend Chavez, the bad boy on the block,  even based all of his programs on $150 a barrel, surely he thought he will get that for his nationalized oil wells and maybe even $500 a barrel.   Russia was also salivating at the mouth, and Iran thought itself as rich and surely they can take the $300, 400 no $500 a barrel oil to the bank.   Well, now we sort of hold him over a barrel , pardon my pun again.   With demand dropping and their economies dependant on oil, which they are getting less for and producing less…guess what. 

Oops again.  

Now what is happening is very simply.  The greedy need money.  They only have one thing to sell.  Oil.  Reducing production only made them less money and with the price of oil dropping, it is getting less and less .   OPEC will make a statement of course that they will be drastically cutting production as they want the price to rise.  But the greedy will play along, and increase their production as their thirst for cash becomes more and more desperate.   Oil drops 10 % they need to compensation with 11% increase in production , just to maintain cash flow.   Meanwhile, back at home once we all wake up from this nightmare of a recession , we will know that  we are better off than anyone in the world at this moment, and that the economy will be as strong as ever due to the low cost of  gasoline….   Which really started this whole recession thing in the first place.  

The greedy OPEC nations however, will get now know the lesson of Exxonomics:   America’s biggest strength is the power of the consumer.