OPEC Leadership's Predicament Leads to Shell's

Two articles from this past weekend's (9/5&6/09) Wall Street Journal caught my attention.  On B6 the article was entitled "Oil Output Quotas Unlikely to Change."  It addressed the leadership challenge of the Organization of Petroleum Exporting Countries (OPEC).  OPEC doesn't often get a lot of sympathy in the US because 1.) our country has become dependent on its product and are at the mercy of other countries to provide us the oil we need to function, and 2.) OPEC is comprised of a lot of countries that often are seen as hostile to American interests.  That said, OPEC is reliant on the US economy to buy its product, and when economic weakness rears its ugly head as it has in the last year, oil prices and the nations that depend on them suffer.  When the recession hit oil prices collapsed from lack of demand.  According to the article "oil prices are up nearly 53% this year," but way down from their all-time high of $147 a barrel in 2008.  As of 9/4/09 oil was trading at $68.02 per barrel.  Oil producing countries, according to the article, "see $70 to $80 oil prices as a comfortable range that rewards oil producers financially without hurting consumers."  This means that these prices are where OPEC feels it needs to be in order make money, but not damage the economies that buy oil from them, which would cause prices to collapse.  

            What I found interesting about the article from a leadership standpoint was that a whole lot of discipline is involved in limiting production in order to stabilize the oil market.  Apparently, too much discipline is involved--"Several OPEC states have pumped well-above their output quotas to capture more oil revenue and keep their ailing economies intact."  This list includes Angola, Venezuela, Iran and even Saudi Arabia.  These companies are pumping more oil than is good for their market because they need the money now.  The leadership of these countries needs to be very strong so that over production does not injure their long-term interests.

            Shell Oil has a related problem, which is discussed on page B5 of the same weekend Wall Street Journal, "Shell Plans 'Significant' New Job Cuts."  Shell is warning of layoffs due to declining profits because prices in oil have fallen so dramatically over the last year.  Shell, like the United States, is in many ways reliant on OPEC, as OPEC is key in setting worldwide oil prices.  The less disciplined OPEC is in pumping and selling oil, the more prices will fall, and the less money Shell will make.  Shell's leadership has to decide what the correct size of their company should be--not an easy task given the fluctuations in oil prices, and the reliance on oil cartels such as OPEC.  

            One bright side to all of this that I see is that Shell appears to be expanding its research into biofuels and solar.  This is where I see a need for real leadership to emerge.  The future depends upon these technologies as oil is indisputably a finite resource.  The energy leaders of the future will need to remain players in the current oil markets in order to sustain their companies, but ultimately they'll need to make the transition to alternative fuels in order to remain companies.