The Biggest Threat to Economic Recovery

By now, in addition to a steady stream of information about daffy congressional behavior, your news sources probably have informed you of the fractious OPEC meeting that concluded yesterday without resolution. Despite the cartel's kingpin, Saudi Arabia, along with Kuwait, Qatar, and the United Arab Emirates pushing for a cartelwide production hike of 1.5 million barrels a day to 30.3 million daily barrels, the meeting ended with no action.

Saudi Arabia and its partners' rationale was that prices today are high enough to constitute a drag on economic recovery. Their desires were thwarted, however, by a lineup of Iran, Algeria, Angola, Venezuela, Ecuador, and Libya, each of which, unlike the other contingent, is essentially maxed out at production capacity. As such, they'd rather push for higher prices in the short term.

Once it became clear that minds weren't likely to be changed -- Saudi Oil Minister Ali Naimi called the session "one of the worst meetings we have ever had" -- prices in New York headed north from a $98.02 low on Wednesday to finish at $100.74 a barrel. Amy Myers Jaffe of Rice University's Baker Institute (whose work I strongly admire) thinks we could be looking at $110 to $120 a barrel in the United States. Note, however, that the center point there is virtually atop the New York Merc's recent high of $114.83.

So where are oil prices headed now and what do they mean for your economic well-being? It depends upon a perhaps dangerously acrimonious OPEC, and several items should be considered:

  • There's a school of thought that Saudi Arabia will now increase output on its own, perhaps by a million barrels a day. Crude and gasoline prices had been slowly slipping, even at current production levels.
  • The Saudis and Iran needn't become more openly hostile to one another. As some Fools know, I've been concerned about the unimaginable results of an escalation of hostilities between the two countries.
  • We can't place obstacles in the path of our own oil and gas industry. You may have noticed that ExxonMobil (NYSE: XOM  ) and its partners Eni (NYSE: E  ) and Petrobras (NYSE: PBR  ) yesterday reported a "hat trick" of three new deepwater Gulf of Mexico wells in an area also being worked by Anadarko (NYSE: APC  ) and Chevron (NYSE: CVX  ) . Noble Energy (NYSE: NBL  ) also reported a deepwater Gulf discovery in May. If allowed to operate unimpeded, companies can find lots of oil and gas in the U.S.
  • Let's hope that Jay Carney, President Barack Obama's spokesman, was kidding when he said the president may open our strategic petroleum reserves. Such a step would do nothing to solve what is a much longer term set of issues.

I could list several other items, but my editor would have my head. I'm convinced more than ever that Fools should exercise care to "re-oil" their portfolios. You can get started with a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies. To get instant access to the names of the three oil stocks, click here -- it's free.

The Motley Fool owns shares of Petroleo Brasileiro. Motley Fool newsletter services have recommended buying shares of Chevron and Petroleo Brasileiro. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named above. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 10, 2011, at 7:16 AM, JCashForever wrote:

    "[Oil] Prices today are high enough to constitute a drag on economic recovery"? Well, it's 2011, and I'm glad someone in OPEC realizes this fact, but this has been an issue since 2008.

    The modern US economy (post-WWII), and therefore the world's economy, is built on two assumptions:

    1. Cheap energy

    2. Stable energy supplies

    Other drivers of the economy (e.g., job creation, trade, innovation, productivity, manufacturing, etc.) are important but secondary to or dependent on the above two assumptions.

    If the US cannot find and reliably supply cheap energy to its citizens and businesses, then, I fear, we will continue to suffer through this economic downturn. Period. You can add other factors if you want to the model, but it's almost as simple as this: Gas above $4, we're in trouble. Gas below $2, good times are ahead.

    We've got to find cheaper energy sources.

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