Great thought to put in a post. I've had similar ideas going through my head recently.

Having a speculative market in oil prices seems pretty strange when you've got a cartel with spare capacity (which we have again now, after OPEC lost control for the last few years). Seems more like a giant game of poker between OPEC and the oil traders than 'efficient operation of the market'.

It would seem that OPEC would have to step up to the $75 target over a period of time. Or perhaps Saudi is large enough that they could almost achieve this on their own. They might have to content themselves with selling half as much production, but selling half as much for twice as much would still seem like a better deal and the rest of OPEC would soon want in on the plan?

It is a completely crazy idea though.. but crazy enough that it just might work??

Not radical at all except in the context of history. So, I guess that does make your "modest proposal" radical. But, it's been my view as well.

I also wrote a short piece on my blog a few weeks ago, suggesting that Russia simply make an announcement wrt their reserves, and production capacity, and costs, and tell the world what their floor is. A big part of the downside in price over the years has been that capacity and supply lacks transparency. So, the market historically has always wanted to price in large upside surprises to supply.

OPEC and Russia would be doing the world a huge favor to make a floor at 75.00. Shame that so few would understand it.

G

Setting a minimum price is such a logical thing to do, one wonders why OPEC hasn't at least tried it before. One way of constraining supply is by raising price, so why not just raise price directly? If the approach were simply raising prices, it seems like other suppliers might be willing to follow along. Why would Norway want to deviate down, or Canada, for that matter?

One could theoretically have a situation where OECD says, "The current prices are too low. They don't allow adequate coverage of oil production costs, so production is likely to fall too far, too quickly. The prices also send the wrong message for alternatives. We support a minimum price level of $75 (or whatever)."

Governments and agencies like OECD should be looking out for their long-term needs. It is hard to believe that the current price levels are supporting their long-term needs. Planning with such huge fluctuations is a major problem.

Most probably missed it because it was late, but we discussed this idea a bit on the 12/4 drumbeat http://www.theoildrum.com/node/4831#comment-440612
An excerpt of one of my comments:
"If I was running a cartel, rather than trying to guess how much oil I needed to put on, or take off the market to reach my price target, I would just set my price, then observe the market and adjust accordingly. For example: OPEC could announce a price of $75 tomorrow.... not a penny less (adjusted for crude quality of course). Of their ~40MM capacity, they may observe that they only have takers for 36MM. They could then adjust production down acordingly. On the other hand, if 41MM was sold, they could bump price up to 80 (or sell to the 40MM highest bidders). Announcing such a policy would be quite a shock initially, but after a while it would work quite well. You could adjust price or supply weekly or bi-weekly as needed to meet your targets. Opec's lack of unity would be problematic,as it is now, but I think Saudi Arabia could pull it off by themselves if need be. Announcing tomorrow that they would not accept less than $75 would probably not reduce global quantity demanded by more than 2 or 3MMbo/d ~33% of current production (9MMbo/d), but revenue, at $75 vs. $40 would actually increase. The current system just seems so clumsy and is clearly inneffective. Setting a price floor really shouldn't be this hard for a cartel with as much cash and as as much market share as OPEC has. The first month might be rocky, but after that the new system would increase revenue, and probably add stability to the whole system.

And the situation now:

1. Strong demand
2. Price spike
3. Inflation and recession
4. OPEC cut supply

I don't see how these points are clearly present now. Indeed, while inflation may return at some point, deflation reared its head a few months ago. The barrel price has plummeted. Demand, while high, is trending down. Perhaps you meant 6 months ago, or perhaps you're referring to 1980/1981. OPEC is having a hard time enforcing supply cuts.

But to your question What should OPEC do?, I'd say tighten the belt, for the ride will be bumpy. Expensive oil is unaffordable, especially during the recession. And cheap oil will provide little income, especially as aging reservoirs become harder to pump and newer ones more expensive to develop. So we are caught in the horns of the Peak Oil dilemma.

This is playing out roughly the way Simmons, Heinberg, Leeb, et al told us it would.

To ensure their future market, they are going to have to keep the price at the highest affordable price for the most customers, which may be $65-$75. It seems counter-intuitive to induce more demand destruction and transition to alternatives, but most must realize this is inevitable, and it's better to have a smoother proactive transition with stable customers (which means their price stay stable and their own countries are reasonably stable) than it is a rough reactive transition with more market crashes and social disorder in importing countries as well as their own.

They should also curb their demand and begin the transition themselves. They have a vast resource potential for solar thermal power generation and should displace FF generation in their own countries. I remember somewhere back in February, the Saudis were told by their leadership to learn to live more frugally, as the days were coming when that would not be an option.

Yep, I suggested it on here a few months back.

The price becomes $x, or more probably €x as 'offers over'. You can also make it so that the extra is food or know how or security pact or anything you particularly want. In essence its an auction where the users bid against each other for supply - which fits much better with a declining supply world.

My guess is it will happen within a short timeframe because it makes so much sense from a producer PoV. Income is known and you can 'buy' things that are not available with only cash.

Once you own the chemical industry you can move the same model there ...

Could an effective top and bottom price come in simply by countries moving more and more to long term contracts?
The pain for consumers on the upside, and producers on the downside, has been intense.
The volatility is the killer.
At the moment the price is low, but the futures market clearly shows that it is expected to rise.
Moving more towards Chinese-type deals where very little of the oil or gas actually reaches the market would seem to be attractive to both.

Of course, if it is strained too much than such systems break down, as for instance may occur when oil gets short when and if the world economy ever recovers.

I posted that idea on the Opec web site two or three weeks ago! It just shows that every one is having the same idea, and obviously Opec is thinking about it. The advantages are many:

1 for OPEC, why would a few traders influence there seeling prices? after all it is their oil, and they don't have to let a few guys in CHicago or London set their prices. Opec could decide to make reasonnable money, and avoid excesses, which is lot good for them anyway long term

2 for the consumers, every one could start to plan in advance their costs : airlines, trains, taxi drivers, all of them are sometimes losing a fortune because of price changes

3 for renewables and new capacities: a fixed price would give visibility to every one. as a whole a fixed price would be good for humanity

I never received any reply from Opec, but you can go on their web site and post your idea, may be it will help hem to react!

The idea of a price floor is so crazy, that it might actually work. Again I wonder why OPEC hasn't done this before? Is it afraid of bad PR?

I was under the impression that OPEC is having great difficulty on agreeing on hard cuts in production targets, since different members have different ideas and interests regarding production quantity.

The primary determinate should be "how much of a cut can we expect to enforce?"

Their most recent cut was little more than "stop producing more than your quota", and even then (IIRC) they recently determined that only 2/3rds of the cut actually happened.

If they announce a massive cut and the market doesn't believe that it will actually happen they will lose crediblity and will be unable to support price levels. It only gets worse as OPEC nations that are observing the cuts see that the cartel overall isn't sharing the pain.

I've also seen little discussion over HOW they should apportion the proposed cuts... which itself determines how successful they will be in enforcing discipline. Whill the cuts be from current production levels or from existing quotas? They aren't at all the same. Some OPEC nations can't hit their current caps anyway. If they agree to a 10% reduction in quotas, it costs them nothing... but would be a far larger cut for other members. Of course it works the other way too.

OPEC is certainly suffering. But who is suffering more? But they might be able to get the production cut by just waiting it out. A lot of expensive oil production out there and no credit to use to float over a bad year. In another 12 months, a lot of non-OPEC production could be off line at these prices.

If I was working for a non-OPEC oil company, I think I would be lobbying for a production cut! OPEC setting a price floor is the best thing that could happen to Exxon Mobile.

I think it is worth considering the idea that price fluctuation may be precisely what OPEC wants. Constant low prices are bad for them. Constant high prices kill demand. Volatility gets them to a middle ground or average price and keeps us from effectively planning movement away from oil.

I would happily pay for a gas tax and hug the politician who implemented it.

First considering that non-OPEC production probably can no longer surge to overcome and sort of OPEC cut as in the 1970's when large increments of non-OPEC supply particularly the North Sea came on line one can be fairly certain that OPEC could set a minimum supply level that would result in some sort of price change.

I'd suggest from all the evidence this summer that a "surge" that fits the definition of KSA's spare capacity happened this summer this as far as we know is not sustainable and we have no reason to believe otherwise.

With a bit of thought given KSA's base production level and the fact that they use well rotation resting fields which has never been disputed and other probably true facts I don't think anyone would argue that KSA does not have the potential to surge exports by 1-2 mbd for 30-90 days.

Next despite claims of production increase any day now non-OPEC is in an overall decline the combination of finanical issues and current low price will have a very long term effect on future supply regardless of if we see a price increase especially if its felt that its the result of OPEC cuts. Thus almost regardless of what the price of oil rises to from now on out very few high cost marginal production projects will be brought online and those that are in progress will be slowed.

Peak Oil in the form of peak production is now almost certainly in the rearview mirror we will never see production as high as over the last several years. So yet again its a pretty safe bet to assume we are past peak production.

If you agree with the above at this point it makes sense to start talking about price.

The first thing we know about prices during a peak event is that volatility increases as you slide over the peak in production. Volatile prices are indicative of a market that is not doing a good job of matching supply and demand. Obviously looking at this years price chart reveals immense volatility. I'd argue that this volatility is a symptom of a market that is missing a fundamental constraint. Some major shift has happened and the market participants have not figured it out yet. Very volatile markets are uncertain markets uncertain markets do not correctly price the supply and demand equation. If the market is not sure about the price of oil how can you use the markets price to bolster supply and demand arguments ?

Next understand this extreme volatility entered the market only in late 2007-2008 before then the market was doing a fairly reasonable job of signaling the need for more supply. I'd argue that this signal sent over several years was repeatedly ignored by the suppliers out of necessity they had no more sustained production to put on the market.

So the market is no longer telling us it needs more oil its telling us it has no fricken clue.

Now lets do a small amount of charting its fairly easy to pick off "fundamental" price points after the fact these are prices they remained relatively stable for a long period of time within a 5% or so range. I've picked off 3 stable price points that are relevant to our current situation 30 50 200.

The 30 price point if you look at the charts pops out as a fundamental price that indicates the market is well supplied with maybe some of the supplies being slightly difficult to purchase. I'd argue this signals problems with light sweet crude supply. We have had numerous discussions over the years highlighting that cheap light sweet crude supply was probably strained. The 50 price point is one in my opinion where supplies of the heavier sour grades become somewhat strained leading to some additional pressure on light sweet.

The next price point 200 has not been reached its one I calculated would lead to real conservation efforts in the US. 5 dollar a gallon gasoline would impact enough consumers in the US that it results in some real behavioral changes.
This is not a market peak but a hard floor price which makes it difficult to continue wasting oil.

Now depending on market perception the current market price can move anywhere within this range these are just some reasonable fundamental constraints. All kinds of other factors will determine where and when the market will move between these price points. Perception changes are very powerful esp given the large gulf between the low prices and the "peak" price. Using concepts from quantum mechanics and even classical we would expect that as long as the market is undecided that it will explore a range of possible prices. This is the volatility raising its ugly head the fundamentals simply work to bound the market if it makes excursions beyond these bounds by a large margin its being unreasonable and will return quickly.

Give the broad span of possible prices I'd suggest that you have little information in peak turns i.e these can be fairly erratic this is one reason I don't call any fundamentals between 50 and 200 non of those semi-stable points on the way up or down had any staying power as people found out.

At this moment the erratic market has probably given us a fundamental signal. It has so far not been able to reach the 30 price point signaling plenty of light sweet oil. This is important if it holds because it means despite all the claims of demand destruction and worries about OPEC cutting the market is telling us its not well supplied. Using fundamentals this early turn is incredibly powerful if you adjust it for the current strength of the dollar its a huge red alarm. If demand destructionist's are correct and the market is well supplied with no cuts then we would have hit 30. That conjecture is almost certainly false. We would need to see a bit more movement to put the 30 turning point safely behind us but given the early turn the chances of it breaching and reaching 30 on a later turn downwards are slim. You can think of it this way the more times the market tries to reach a price and fails the greater the chance this price is no longer viable.

The stability of the next price point i.e supply constrained on light sweet ample supply of heavy sour grades is dubious but still strong we held it to some extent on the way down it probably will hold a bit on the way up.

However 2009 is not 2007 its fundamentally different !

With heavy sour grades from the tar sands upwards you are generally looking at complex refining to maximize the output of gasoline and diesel per barrel this complex refining requires extra NG. The problem now is oil prices have fallen to the point that NG prices and oil prices are very close on a per btu basis. If you take the fuel oil fractions then the are effectively equal per btu to NG. Natural Gas is no longer a significantly cheaper energy source vs oil.
But NG and oil prices are intertangled because they act as substitutes for each other in a number of use cases. The two prices do not move independently. Worse the current NG prices coupled with the financial turmoil have resulted in serious cutbacks in drilling by many NG players and many unconventional source have sharp decline rates. In short we can expect going forward for NG prices to have a very strong floor.

From fundamentals I'd argue that the early turn was the result of NG prices not declining because of supply shortages and thus not allowing a further decline in light sweet prices since complex heavy sour refining was unprofitable with the mix of NG and oil prices. In any case as the price of oil declined it has become entangled with the formerly cheap NG market and seems to have been unable to push North American NG prices down to the 2-4 dollar range that would match with 30 dollar oil. With NG if you correct for the stronger dollar one would see that NG prices have remained fairly sticky. The correction is not super important but it does help if you think a fundamental signal may be weak. I.e if the dollar was falling and NG prices not falling as fast inflationary forces can be argued. If NG and the strength changes of the dollar are roughly equal one can argue that the fundamental signal is fairly strong.

In the case of the price runnup the falling dollar coupled with rising prices served to add a premium to the oil prices. Again its not super important but it helps.

Back to now. So we are pretty sure that light sweet crude is not in abundant supply NG prices are indicating that overall energy demand is still robust and cannot be met by traditional cheap NG sources. The collapse of the UNG plays ensures that NG prices will remain fairly strong for the foreseeable future.

Now we turn to heavy sour crudes again 2009 is not like past years the tar sands where ramping up the entire time that supplies of even the heavy sour crudes where signaling they where in tight supply. The effective collapse of Canterell was to some extent offset etc. In 2009 given the current economic condition and rapid price changes we can assume that supplies of heavy sour probably wont be as plentiful the tar sands are done expanding.

The entanglement with NG ensures that NG prices will almost certainly rise as crude prices rise putting further pressure on light sweet prices.

And finally given all this we can talk about OPEC cuts. This fundamental situation is very unstable and despite the calls of demand destruction it seems to me at least the fundamentals will lead to a significant price increase soon without any external forces. OPEC cuts will simply serve to fan the flames and cause the market to misunderstand the real reasons for price increases. They will blame OPEC and thus assume the prices are artificial leading to continued slowing of projects ensuring we never get adequate oil supplies or recognize that peak oil is here till its to late.

KSA is playing with fire and attempts to control the market will eventually backfire in spades as it becomes clear that they are actually unable to set a floor price. Any moves by OPEC now to cut oil supplies can only serve to move the market towards 200 faster than it might have otherwise moved "maybe" in my opinion it will resolve the issue and head there quickly without help.

So can KSA and OPEC set a floor price on oil or any price I doubt it they are no longer in control all they can do is misguide the market a bit more. In this case upwards but for all the wrong reasons.

If they did that, it would be the straw that breaks the camels back. Demand destruction incentives like gas tax and alternative fueled vehicle incentives would be politically popular in the US.

No politicians in a democracy has the balls to do something as radical as a price floor. Please prove me wrong.

I have to apologize for repeating myself from yesterday, but I'm not sure how many of you guys read my comments, and I think it is a very-very important issue. With that said, I'll repeat it. Sorry if you find it irrelevant.

http://www.theoildrum.com/node/4856/442615

---------------

This is extraordinary BREAKING NEWS

http://www.bloomberg.com/apps/news?pid=20601072&sid=aV0wbL7Jbyqo&refer=e...

Dec. 10 (Bloomberg) -- A further decline in global oil prices may delay or halt investment in exploration and production projects, according to Fatih Birol, chief economist of the International Energy Agency.

"If prices were to go lower, investments could be delayed or canceled and we would pay the cost in the future," Birol said today at a conference in Paris. "We could get a supply crunch."

Birol urged OPEC countries, meeting next week in Algeria, "to consider the fragile situation of the global economy today" and noted the need for $80 oil to ensure the viability of "marginal" production such as deep offshore projects.

What's extraordinary about it?

Not the news directly. We knew this. What's more, we knew they had known this. They may have known we know this. So far so good.

But at this very moment they acknowledge defeat. Our collective. We have all been defeated. The game is up. We can do nothing. We ask OPEC to help. It doesn't matter any more how much anyone earns. We have to do it collectively. In case we do not, we are about to go extinct. And that's what the IEA says. The energy watchdog for the OECD. For you and me.

That's a nice piece of information to know, isn't it?

This is something entirely different than 'the end of cheap oil'. This is the end of free trade as we know it.

In order to have free trade you have to have individual participants, with their respective decisions. Their decisions are linked to what they think the price will be. The IEA's statement is this: Forget about speculation. The price has to be this and that in order to avoid this and that.

That is called central planning. In other words: not free market capitalism.

This is notesworthy, people!

Opec should cut production by 10-20% which will raise prices a bit to raise their profits.
That will completely screw the US oil companies.
Then Russia seeing the opportunity will start pumping like mad to raise cash and Opec will gain a smaller profit.
If they cut too much the world economy should contract much more(bankrupt transport companies, many countries, etc.) and since Saudis usually makes more in OECD investments than in selling oil, all this will actually hurt them the most.
An upside would be if the cut brought rationing to the OECD and a 'permanent' decline in world oil demand.

If we're lucky it could change a 5 year recession into a 50 year depression.

It would also be marvelous for biofuels.

The premise of the original article is correct in its aims, but wrong in its means. As long as we are abandoning a free market set price for oil and replacing it with a fixed price, then we should be advocating that it be done on our end, not on the supplier end. A government set minimum price of crude oil, enforced by a varying tax on (?imports / local production?), with the tax proceeds either rebated to the broad population evenly, used to reduce government debt, or used to invest in alternatives, is far smarter. Obviously the tax should adjust according to product quality as well.

Perhaps a problem then would be "consumer cartel cheating", similar in effect to "OPEC quota cheating"? What would be manifestations of that? Do we wind up needing to create an "OCEC" cartel of cuctomers rather than producers?

This bit about having the world divided up into 200 "independently governed" entities just doesn't work, in a whole lot of ways.

What OPEC should do is demand gold for their oil.

Of course, we would immediately realize that we would soon be broke. Then we would act responsibly and do everything within our power to not use oil. This would be painful in the short run but would possibly prevent the great collapse. However, it may already be too late.

There may be alternative mechanisms to achieve a similar result since cartels or coalitions like OPEC are inherently unstable. Governments in net oil importing nations could set a price floor and perhaps pocket the difference if the import price was too low. Thus if the refiner pays an audited $55 then the government says we're taking another $20 so the real cost is $75 per barrel. Another approach would be an import quota. I believe the US currently imports about 20 mbpd. With a declining quota that could be 20 a day for the first year, then 19, 18 and so on. Note the quota may not be needed in a recession and after a few years post peak.

Of course some will say that the oil importers who don't do this get the advantage of lower prices. They are also the ones who will eventually be caught short.

I'm waitin until very late in the thread to say this out right.

Several comments have danced around this but...

with the implicit agreement between KSA and therefore OPEC and the US, The question should be what would the US allow OPEC to do?

Let us not be naive here. You all are acting as if they could simply decide to do what ever they want.

Oh! I wonder why they never thought of placing a price on oil? Gee, why didn't they think of that?" Hmmmmmmmm?

pulling protection?
bombing into stoneage?

The poor US has been at the mercy of OPEC for so long please help us. wtf?

they should give green stamps with every fill and maybe a tigers tail for the antenna.
then get inside, sit down , hold on and shut up.

nothing more.

sorry ,could not resist.

as a "billy beer keg" average kinda guy , I have read through this and wonder to myself

what price democracy ?

I have a party that speaks for the rich

I have a party that speaks for the poor ( alleged)

neither is concerned that much on energy supply at all

I have seen on this site and others we can live without oil for transport but not gas for food . each party does not seem to notice whats going on.

then I read about Athens and , cant remember who, but its democracy was tied to the silver mines near by , once gone Athens went to dictatorship - no "free" money if you will.

I see this with Oil , once gone or going then can we really have a democracy?

cartels instead of free trade or just mercantilizism ?

at least the States has a bill of rights, we have the parlement to defends ours - oh god help us........

Forbin

guess I just a ramblin' ... :)

I guess the first question I have is what is OPEC thinking. The world economy is in a state of total failure and OPEC wants oil prices to go back up! Why? To keep the economy from any type of recovery? No The problem lies with the Opec countries that subsidize there programs to stay in power. and now that oil is low they cant afford these programs and civil unrest is at hand, along with not being able to sponsor terrorism to keep the rest of the middle east uneasy.
It was only a little over a year ago, Saudi Arabia was saying $50 a barrel was a fair price for oil, now they announce that $75 a barrel is a fair price. So how did $25 get added to there assesment in a year. Simple OPEC now feels $147 is where oil should be, and that they deserve that. I think the only fair way to do anything is to call oil what it is a neccessity and not a commodity. Almost every means of transportation is a oil based fuel. So how do we handle that, How about oil gets a cost of living raise just like we do 3% to 6% a year and to make it fair we will start at $62.50 a barrel, so next year add your cost of living of 3% to 62.50, so next year is $64.38. But we know that will never happen. We need to do whatever it takes to support ourselves. Start with mandatory recycling of everything, Ecspecially PLASTICS AND WASTE OIL. And unless we start creating more nuclear power plants, forget the electric cars. We can split atoms and we can't come up with anything but the internal combustion engine. In the end Hydrogen seems to be the only true clean way to go. It is renewable, and it has the same if not better abilities as gas. Oil will still be needed and companies will still need refineries, but we need to leave commodities and the middle east where they want us the stone age....

I have enjoyed the discussion and it is great to know that many others share my opinion of what OPEC's options are.

Of course, this idea of setting a price equitable to the producer and the consumer comes under the heading of "price controls". While it may be an anathema to free marketeers it would provide a stable platform for those preparing to introduce both new oil capacity and new alternative technologies.

Perhaps you could consider the following:
1. Price certainty as we approach the "peak" is good for all.
2. KSA may be the only true swing producer left. That gives them greatest influence within, if not control of OPEC, doesn't it?
3. KSA may have already thought of this and begun testing the hypothesis with their surcharges to Asia
4. OPEC probably need more than 50% of world supply to make this work
5. Why did OPEC meet and discuss options prior to 17 Dec?
6. I don't think it was the first USD70/bbl that caused problems to world economies, but the second in the run up to USD147/bbl

Personally, I would regard a stable price deck, influenced by the moderate Saudis (?an oxymoron?) as infinitely more acceptable and useful to society than helicopter Ben and other Central banks bombing their economies with $$$$.

A lot of what happens depends on the debt destruction cycle. The oil price went as high as the creation of new debt could sustain. It's clear that the population of the world can produce products and exchange them at a pretty high level. However, most of what is produced has not been paid for. Most of the oil pumped has not been paid for. When you use a medium of exchange that has no value of it's own, i.e. is just a token, you run the risk of being the one holding the tokens when they are declared invalid.

That is exactly what happens with debt. A promissory note is apparently a nice thing to have if it is paid back. It appears to have value, i.e. the principal value and it also appears to pay a return, the coupon. The problem with the principal is that it might be purely fictitous as in a mortgage. A mortgage is an instrument whose value rests upon the abililty of the maker (the home buyer) to pay the coupon and eventually pay down the principal or flip the note to someone else. The latter doesn't solve the problem, only the former. The time difference in the two is huge.

Unfortunately, the world has produced about thirty years worth of goods in the last 5 years I suspect. Now we have to sit back and use them up. The only solution to the problem with the debt destruction is wiping clean the slate on these defaults. Apparently the owners of the notes are unwilling to accept this solution because it would impoverish them (or so they feel). That is why the US govt and the Fed are attempting to trade bad notes for "good" notes. The problem is, they aren't solving a thing. They are simply extending the duration difference between now and the time the principal can be made good by piling more debt on the same people who cannot pay their mortages today. That isn't going to work.

Ultimately, debts must be forgiven for the cycle to start again. The Bible calls that a Jubilee. I doubt that it impoverishes the holders of the debt but it does reduce their power substantially and I suspect that is where the rub lies.

At this point I don't know how it will all play out. However, make no mistake, it's all about maintaining power for the people who hold all these promissory notes. If the notes are defeated, their power goes away and that basically means the US collapses and the rest of the world follows. What happens after that is a realignment of economic and military power on a worldwide scale. That could mean another big World War which is exactly what happened at the end of the Great Depression.

Is This true???

http://www.guardian.co.uk/business/2008/dec/15/oil-peak-energy-iea