The Wake

For years the Organization of the Petroleum Exporting Countries (OPEC) has had a considerable chokehold on price fluctuation of the oil market. Since its inception in 1960, it has used (and abused) its power as a consortium to intervene with the cycle of supply and demand, sometimes with disastrous effects.

With oil prices currently plummeting, OPEC is scrambling to form a plan of action. After peaking at $147
dollars per barrel in early July, the price of oil has more than halved in just a few months. As businesses make cutbacks or close their doors altogether, demand has dropped significantly below production. Attempting to counteract the collapse of its lifeblood, OPEC has called for an emergency meeting to be held on October 24th.

It is likely after the meeting that large scale cuts in oil production will take effect. However, with the
economic climate as unstable as it is, economists have hypothesized that increased oil costs will only
worsen financial woes two-fold, as inflation is driven higher and demand continues to decline. The move could also prolong the recession, as new enterprises may not be created due to, among other factors, high energy costs.

As the issue remains looming over the heads of the overwhelmed general public, concern should be
raised about OPEC contributing its own piece to an already complicated puzzle. Low priced raw materials will be crucial to the market’s recovery. Should OPEC choose to move in favor of its individual interests, a lot of us (including Sarah Palin’s friends “Joe Six-Pack” and “Average Hockey Mom”) are going to have to atone for actions taken completely out of our control.

If the idea of OPEC having an effect on the American economy lacks prospect to you, then perhaps it would be helpful to look back thirty-five years. In 1973, several Arab members of OPEC imposed an embargo against the U.S. and all of its allies for their support of Israel against Syria and Egypt during the Yom Kippur War. Production from the countries decreased five percent per month for five months, until the two sides finally settled the dispute in March of 1974. Though the oil embargo was short lived, it exacerbated the impact of the 1973-1974 stock market crash.

At the time, stock futures were dismal under the collapse of the gold standard, which caused devaluation and inflation of the dollar. During this two-year period, the Dow Jones Industrial Average lost 45% of its value. It would not be until August of 1993 that the Dow would return to its original worth.

The million dollar question will be whether or not OPEC is effective and strong as it was in the ‘70s. It is possible that other oil-producing nations outside of the cartel could undermine its strategy, as they look toward their own individual economic interests. Countries such as Russia or Venezuela may not be able to cut production because they need the money too badly.

To further complicate matters, many of the members of OPEC have hidden agendas. Take Saudi Arabia for example: Iran’s nuclear program poses a large threat to the Saudis, who are forced to rely on their tenuous relationship with the United States for protection against atomic assault. Saudi Arabia may be the wild card in the vote on the 24th, as they seek to placate the needs of the West to gain political ground against Iran.

So where does this leave the consumer? Once again bowing to the almighty will of the marketplace. The price of oil could sink lower as demand continues to drop, but once the economy recovers, the oil market will too. That being said, I offer up one piece of advice: as stocks perform poorly and the housing sector bottoms out, one of the wisest investments to make right now is gasoline. Those with the resources to stockpile it at low prices will come out way ahead when costs start to soar.

The importance of an effective energy strategy cannot be stressed enough during economic times such as these. When America is weak and the affordability of oil rests in the hands of some of our most dubious enemies, the fate of the country is being gambled. Alternative energy sources need to be aggressively sought out by the next President and Congress, lest we find ourselves in a similar
position down the road.

Diplomacy is a game of chess. Every move must be made with intent and insight on how it will affect the course of the game’s outcome. Though there are many important factors to consider, it is certain that for too long America has been a sleeping giant, encumbered by the high cost of energy. The more this country depends on foreign oil, the higher the likelihood it will be damned to a future of
unstable markets and price gouging at the whim of some of its most dangerous enemies.