OPEC's Dilemma: Production Cuts and the Price Crash

The Organization of the Petroleum Exporting Countries (OPEC) has recently agreed to cut production by 10 million barrels per day (mbpd), the largest reduction in history. However, despite this significant move, the price of oil has tanked by over 9% in a single day. This begs the question: what else can OPEC do to prevent the oil price crash?

Stopping the Production: A Unlikely Solution

One might consider the option of simply halting oil production altogether. However, this is hardly a viable solution given the intense pressure from major oil-producing countries within OPEC. For instance, Saudi Arabia has already signaled that the maximum possible cut OPEC could achieve is about 19 mbpd. If we assume that the current demand deficit due to the COVID-19 crisis is about 30 mbpd, it means that even with these maximum cuts, the market would still have a supply surplus of about 11 mbpd. This situation is unsustainable with storage already near full capacity, making a price crash seem inevitable.

Second Position: ERY and Barrick Gold

While the exact decisions of OPEC are pivotal, individual investors are also betting on the future of the oil market. My second-largest single position is in ERY, a fund that operates opposite to the oil-producing companies. This is particularly true considering my largest position is in Barrick Gold, a company heavily dependent on gold prices. The current situation is more of a bet on hyper-inflation, driven by the vast amount of money printing by the US government.

Addressing the Broader Economic Issues

The underlying economic issues extend far beyond just the oil industry. The global economy has suffered since 2010, with the effects now becoming more apparent, impacting the crude oil industry among others. One of the biggest problems is the inefficient allocation of capital. High fossil fuel cartels invest their proceeds into the stock market, leading to stock market gains that are much higher and lower-risk than investing in real industries like tourism, construction, and education. As a result, industries that truly drive innovation and economic growth remain underfunded.

This cycle of investing in offshore banking and the stock market sustains a stagnant real economy that is on the brink of collapse. Even after the coronavirus crisis subsides, the economy will not recover until the stock market and offshore banks are no longer dominant forces. This suggests that the current economic model is unsustainable and needs a fundamental shift towards more balanced and sustainable investments, which can truly drive growth and stability.

Conclusion

The situation facing OPEC is complex and multifaceted. While large-scale production cuts are essential, they alone may not be enough to prevent the current price crash. The broader economic issues, including inefficient capital allocation and stagnation in non-fossil fuel industries, need to be addressed. A shift towards true economic growth and vitality will require substantial changes in how capital is allocated and invested. Only then can we expect the global economy, and particularly the oil market, to stabilize and thrive.