Hundred Dollar Oil

HUNDRED DOLLAR OIL....Via Brad DeLong, Jim Hamilton reviews some recent economic data and suggests that although oil at $100.01 might indeed be a sign of surging inflation, there are other possibilities too:

[Alternatively] you could try a line that to me seems a bit more natural: incoming data aren't confirming the initial notion held by many that a recession began in December. If so, it means that the Fed's easing will come to an end within a few months, and that the demand for oil, copper, and most everything else is going to be stronger than many of us had been anticipating as of a few weeks earlier.

If so, $100/barrel might not be as bad news as you thought.

Well, sure. I guess that's possible, if unconvincing. But what struck me in the news reports about oil breaking the $100 barrier was the chatter about OPEC cutting production rates at its next meeting in March. The explanations were the usual ones: inventories are now at reasonable levels and OPEC always cuts production in the spring anyway. So, you know, it's not a big deal.

But this sets off alarm klaxons in my brain. It doesn't really matter whether the reason for increasing demand is economic optimism, soaring growth in China, or anything else. If it's really true that demand is high and likely to get higher — and oil at $100 a barrel certainly suggests this in the strongest possible way — then why would OPEC be talking about production cuts? Even just as saber rattling, what's the point? Are they trying to drive prices even higher? That makes no sense.

So what does make sense? My guess is that they're playing games: announce the possibility of cuts, and then when production quotas stay level after all everyone breathes a sigh of relief. And once again we're all distracted from the very real prospect that, quite likely, keeping production level is the best OPEC can do these days. They can't increase production anymore — not for long and not in serious quantities, anyway. Iraq is pretty much the only Middle Eastern country left with any spare pumping capacity, but for obvious reasons it can't take advantage of that at the moment.

The latest oil news is not just a short-term spike. Oil prices have been climbing steadily for six years now, and if OPEC had any real control over their pumping capacity they've had plenty of time to demonstrate it. The fact that they haven't, and are continuing to do everything they can to talk down the possibility, speaks volumes.