OPEC rejects higher oil prices - Prefers stability

June 3,2006

The regular meeting of OPEC took place in Caracas, Venezuela, on Thursday June 1, 2006. Its host, President Hugo Chavez, pressured the members to decrease supply and raise the target price per barrel of oil. Since their last meeting, the OPEC basket price of oil rose to $64.80 per barrel on May 8, its highest price in years.

OPEC, which supplies 40% of the world's oil, is operating at capacity, at 33.8 million barrels per day (bpd). Since only Saudi Arabia has any spare capacity, this means supply cannot increase, so oil prices cannot go lower. Although Chavez won’t get his way, they also agree that oil will stay above $50 per barrel - indefinitely.

What it Means:
Although Venezuela is one of the smallest OPEC producers (2.5 million bpd vs.10.5 million bpd for Saudi Arabia), President Chavez promotes higher prices as a way of increasing the value of this limited commodity thus gaining more economic and political clout for oil producing countries. This position is very attractive to other smaller producers, including Algeria, Libya and Indonesia.

Action Steps:
The world of high oil prices is here to stay. This not only affects you directly, through high gas prices, but also indirectly, through inflation and higher interest rates. Factor this new reality into all your decisions: i.e., if you are buying a new car, get one that is fuel efficient; if you are moving, consider commute lengths, and get a fixed interest loan.

In addition, ask your financial advisor to make sure you have a good natural resources fund in your portfolio - so you ,too, can profit from continued high oil prices.

Source:
U.S. Dept. of Energy, OPEC Oil Production; VOA News: Geopolitics Slipping on Oil

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