September 12, 2007
$80 oil
It did not take long for the oil market to deliver its verdict on Opec’s production increase. Just over 24 hours after the announcement that the goup would pump an extra 500,000 barrels a day, oil has surged to a new record of $80 a barrel.
Technical factors are part of it. Traders say there are big speculative positions in call options that will pay off above $80, and the hedge funds want to force the price up so they can collect.
But it also sheds an interesting light on the power of Opec. The economist James Hamilton makes a persuasive argument that Opec is not "a functioning cartel", but instead "a group of countries loosely announcing what individually they’d each pretty much want to do on their own anyway." (His work on Saudi Arabia’s oil production and potential is also interesting, although highly contentious.)
In a sense,it helps Opec to dispel its image as a sinister all-powerful cartel that can hold the world to ransom. The ministers always say: "we do not set the price"; the past 24 hours have proved their point. On the other hand, being exposed as ineffectual cannot be good for Opec either.
