I disagree oil demand is known to be inelastic once they figure out that most of the demand drop was from the crashing housing industry and that further demand reduction is inelastic I think they will have no problem ensuring that we have a depression with high oil prices.

And thats assuming that OPEC actually has enough spare capacity to have a long term effect on oil prices. So far the data for 2008 indicates that at best they have some short term surge capacity that lasts only a few months and worse results in low production in the months before the surge as normal production is redirected to storage and after the surge as fields are rested and normal storage levels restored. So basically it seems OPEC can surge production for 2 months at the expense of 4-5 months of low production. Thus they can only surge once a year this leads to artificially high prices in the months leading up to the surge and artificially low prices after the surge. The net effect is simply to increase the volatility of oil prices.

Obviously the increase in oil prices is a factor however it was the zero initial interest with the actual interest rate tied to some variable of interest rate. People's payments went from $500 to $1800 so they walked. Congress encouraged this low income "own a home", the banks went along, the realtors made out like gang busters, the title companies were happy so who gets to pay for it all. Mostly the people who own their home and pay taxes because the low income people nor the financials don't pay taxes anyway. They got cheap rent for a couple years. Why are we not surprised?

Even with $1/barrel oil, the housing prices were unsustainable. The ridiculously lax lending standards and leverage insured that the parts of the economy not directly related to housing or banking would also be seriously impacted.

Most "subprime" and "Alt-A" loans had very low payments for the first couple of years that then reset higher. The idea was that rising prices would happen and they could flip it.

Daxtatter,

I would tend to agree. If we are to take Saudia Arabia's official statements at face value when oil soared to $148/barrel, it was very uncomfortable with that price. But again, we live in a Machiavellian world, and I am highly distrustful of proclamations and appearances of political players, even those emanating from Saudia Arabia.

There's an article posted above--Oil, war, lies and bulls**t'--that although obtuse and horribly written and difficult to follow and understand, gives some interesting insights.

The author argues that Pax Americana, American hegemony, American exceptionalism or what I call American neo-colonialism ended in the 1970s. The cartel (the seven sisters) that had controlled oil prices from 1928 to 1973 thus became inoperative. He argues that globiliazation then became the dominant paradigm and oil prices since have been determined by global markets, with the "long-run price" of oil gravitating towards the cost to "produce" a barrel of oil from the "marginal" oil field.

I find his history somewhat blinkered. To begin with, the demise of the U.S. cartel pretty much conicided with peaking U.S. production, an issue he doesn't address. Also, after the U.S. cartel folded, OPEC tried to pick up the ball and run with it. But its efforts were premature. It encountered a world-wide recession in the early 1980s that greatly curtailed global demand, and at the same time it faced increasing non-OPEC production. So it wasn't able to carry the ball through the goal posts.

I also find his explanation of "long-run price" discovery in the global markets to be somewhat lacking. He argues that " 'marginal' oilfields must not be necessarily identified with the newly invested capital on the newly leased fields, but with the ones that are already producing the bulk of oil from the older oilfields in the United States." In other words, what he is using as his basis for price discovery is the lifting cost of what I have heard referred here on TOD as "legacy" or "heritage" reserves. While this may have been the operative price discovery mechanism in the period between 1985 and 2005, when there were an excess of heritage reserves to be pumped out of the ground, that surely was not the case in the interim 2005 to 2008. But, that said, if the looming recession is long and deep and world-wide, and a great deal of oil demand is destroyed, the price discovery mechanism he describes might once again become operative.

But there again, maybe not. For the other thing the author seems to not be cognizant of, or in denial of, is that non-OPEC production appears to have peaked in 2005. If this is indeed the case, whereas the OPEC cartel failed in the 1970s and 80s, largely due to an increase in non-OPEC production, a renewed attempt almost certainly would not fail now, especially if it is joined in its efforts by Russia.

If neo-colonialism has indeed ended, or if Saudia Arabia decides to throw the U.S. overboard and join forces with Russia (which seems to have its own colonial ambitions), what I see is the emergence of a new cartel. And this time, unlike in the 1980s, it will not fail.

There is also another possibility, and that is that we have reached global peak oil, and if supply plummets faster than demand, OPEC would be powerless to control oil prices.