The Oil Drum

Over in the Sept. 22 Drumbeat, andyh made the following observation:

I thought the most germane of todays drumbeat offerings was the OPEC piece which stated:

''The surge in oil prices to record highs will shield OPEC nations, some of which peg their currencies to the US dollar, from current dollar weakness, a Saudi newspaper quoted OPEC sources as saying on Saturday''.

It maybe in typical OPEC code but I think this is OPEC for the first time stating that they are now happy with $80 oil (having moved their target price from around $70).

This is of course a very obvious consequence of the fall in the US$ - OPEC members are effectively only getting the same bang for their buck as they were when oil was lower but the $ was higher (and not only that but all their US investments have devalued in the meantime).

It also represents the flip side to the Fed's interest rate miscalculation - in fact its not difficult to envisage an upward spiral developing whereby falls in the US$ result in OPEC wanting progressively more for their oil (and who can blame them). This may not hurt the inflation figures of say the Euro nations who are protected by a surging Euro but it sure as hell will come back to haunt the Fed as oil inflation surges. So do the Fed abandon any pretence of keeping inflation around 2%??? You betchya.......

I do believe, that in addition to everything else that is going on, andyh is correct about OPEC's new position. Thus, their supposed promise to review and increase production if oil stays over $80 per barrel will be conveniently forgotten in 10 days or so (at which time oil will have been over $80 for well over 2 weeks, OPEC's original deadline for "stepping in" to correct an "overly high price").

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone