A huge irony of the Iran war is how much it will end up pushing down oil prices – and it is largely because the war broke OPEC.
OPEC (Organization of Petroleum Exporting Countries) came onto the scene in 1973 when it embargoed oil in response to U.S. support for Israel in the Yom Kippur War.
Oil prices very quickly quadrupled from $3 to $12 per barrel ($22 per barrel to over $80 per barrel in today’s dollars) – crushing the world economy.
That would be like oil shooting from $70 to $280 per barrel today. Keep in mind that in March, the world absolutely panicked over the prospect of $150 (oil is $75 now).
In other words, 11 tiny OPEC countries (Iran, Iraq, Venezuela, Indonesia, Libya, UAE, and more) brought the world to its knees by establishing an effective cartel to control oil production.
And it worked for decades – until now.
Peter St. Onge posted this video today: Iran War Could Bring $40 Oil (3 minutes; well worth watching).
TLDW: When OPEC was formed, they controlled 80% of the petroleum exports. Prior to the war, they controlled just over 50%. And now they control less than 50%.
What first started to hurt OPEC was other non-OPEC producers increasing production – led by U.S. shale producers (making the U.S. the largest petroleum producer by far, followed by the likes of Canada and Russia).
OPEC tried to expand OPEC into OPEC+ by adding countries like Russia and Brazil – but that has not been effective because everyone cheats when they are asked to curtail production to prop up prices.
In addition, the Iran war has exposed a lot of resentment among OPEC members, causing them to cheat more aggressively or drop out of OPEC like the UAE did.
So now, when OPEC curtails production to prop up prices, it is merely subsidizing non-OPEC countries, which quickly step in and sell even more oil to take advantage of the higher prices.
It would be like if Cross Country Mortgage, Rocket Mortgage, and Chase formed a cartel to charge higher rates for mortgages. Because they don’t control enough of the mortgage market, competitors would just step in and steal all their loans by offering lower rates.
A few weeks ago, I blogged about Alan Greenspan’s legacy – and how he got so lucky because increased productivity from tech and an influx of cheap stuff from China offset the inflation his excessively low rates might have fostered.
It is the same with falling energy prices now, as they will significantly offset the impact of our politicians’ drunken sailor inflationary spending. Add in some AI productivity gains, and we might well be saved…
Or not.
Oil prices have an enormous impact on interest rates (which is why rates are up so much today).
So, no matter what, plummeting energy prices will keep rates much lower than they would otherwise be.
