Low pointers

OPEC exists for one purpose only: to help countries dependent on oil revenues maximise those revenues. But oil last week was around 44 per barrel, meaning that oil exporters everywhere were feeling massive pinches 8212; even worse when a lot of them have expansive governments who took high oil prices for granted when planning their budgets. Naturally, there was a sense of barely-contained panic when the cartel met in a conclave in Algeria, which was expressed in the decision to make their largest-ever production cut 8212; by over 2.2 million barrels a day. The price of oil responded immediately 8212; by falling below the 40 barrier.

There are many reasons why the news of a cut made no difference, or could even be said to have had a perverse effect. One is actually pretty good: the markets are working the way they should. They correctly predicted that OPEC would cut production, and that expectation has already been factored into the prices. Other reasons are far, far less upbeat. One is that we live in a world in which 8220;queuing8221; rules, where the fact that we are operating at near-capacity means that wild, unpredictable, price oscillations are to be expected. Anecdotal evidence of full supertankers going around in circles in the Gulf of Mexico waiting for onshore inventories to deplete tends to support this. This is particularly bad: after all, when oil was 8220;too high8221;, governments found their ability to respond to a threatened slowdown severely cramped because of fear that expansionary fiscal policy would exacerbate inflation. Today, with oil 8220;too cheap8221;, there is danger that much-needed reform will be lazily postponed.

But the explanation underlying and overshadowing this is very worrying indeed: and that is that the markets are deeply pessimistic about future world demand. Part of this is a recently-released US government report suggesting that American oil demand will not grow between now and 2030. But the vast majority of this is outright pessimism about the recession, about its length and severity. Whatever we are told by heads of government worldwide, whatever fiscal stimulus has been announced, the markets have spoken: they don8217;t believe that enough is being done. Governments must listen.