OPEC May Cut Oil Production

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While the financial empire burns, OPEC decides whether or not it’s going to cut production today. Lower energy prices are about the only good news to come out of falling commodity and stock prices. But OPEC producers like Venezuela and Iran want the world’s big oil cartel to cut production and put a floor under prices.

You get the feeling that OPEC doesn’t want the oil price to go too low. The U.S. Energy Information Administration forecasts an oil price of US$126 next year. OPEC probably doesn’t want the oil price to stay that high. The market, meanwhile, is sending oil down to $100. What we need is a goldilocks oil price, not too high, not too low…just right!

The reason OPEC doesn’t want the oil price to be too high is that it encourages the rapid development of the alternative energy industry. You don’t want your product to be so expensive that your customers begin looking for substitutes.

By alternative, we don’t necessarily mean wind, waves, solar, and geothermal (although they are all industries we’ve analysed with Kris Sayce in the Small Cap letter). You also have to consider unconventional hydrocarbons (coal-to-liquids) as “alternatives” to crude oil. These industries are flourishing in Australia, even if there’s no “big” oil company to buy.

Wall Street is extremely depressed today. We always make a point to watch CNBC when we’re back in the States just to gauge what the shills would like us to think. They are trying to bottom fish in the financials. But it’s a pretty tough sell. Why?

Shares of Lehman Brothers are down 30% on the day. The usual suspects are to blame. The company is seeking new capital. It can’t find it. Shareholders are headed for the exits. Where will a strategic buyer come from? The Korea Development Bank looks to have walked away from a deal. Who else?

It’s probably not going to be the U.S. Government. It’s busy spending US$200 billion bailing out the U.S. mortgage industry. And the auto industry has its hand out too. Ford, GM, and Chrysler are asking the U.S. Congress for US$50 billion in loan guarantees. Anyone else need tens of billions to stay in business? Anyone?

All this comes as the U.S. Congressional Budget Office reports that this year’s Federal deficit will be over US$400 billion, up from $167 billion last year. Next year, CBO reckons it will be more like US$438. And these numbers are prior to the spending on Fannie, Freddie, and anything that might come the auto-makers way.

It’s not surprising. But let’s not forget this is what happens when an economy systematically misallocates capital. It destroys wealth and creates these financial bread lines. The government becomes the capitalist of last resort, providing the funds to keep industry humming (or mortgage lenders lending, as the case may be).

The trouble is, the government is not lending from accumulated savings or its own huge capital stock. It’s borrowing. More debt. More deficits. The business of America is now borrowing.

By the way, we caught up with our old college friend and former publisher Addison Wiggin in Maryland last week. Addison is the Executive Producer of I.O.U.S.A. It’s the movie version of Addison and Bill Bonner’s book, Empire of Debt.

Addison tells me a DVD of I.O.U.S.A. is in the works. He’s not sure if the movie will be distributed in Australian theatres. But we’ll keep you posted.

The Aussie market? Al Robinson and Kris Sayce are on the case over at Money Morning. For more on that, check them out at http://www.moneymorning.com.au.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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