Before the Bell – OPEC (The Emperor Has No Clothes)

OPEC (The Emperor Has No Clothes) – For decades the United States has lived in fear of OPEC and the power the cartel holds over world energy markets. The 1973 oil embargo marked the beginning of a long-term rise in oil prices which helped fuel an inflationary period that brought our economy to its knees. In the decades that followed, our foreign policy initiatives always had to consider OPEC reaction and the potential disruption in crude supplies, the life blood of our economy.

Huge cracks are developing within OPEC. The Wall Street Journal reports today that one Saudi official said “Saudi Arabia is done with its role as swing producer. It is not Saudi Arabia’s role anymore to adjust output to protect the market or balance it. It is the responsibility of OPEC.”

That is an enormous statement coming from the cartel’s largest producer. For decades, member nations have cheated on their quotas, forcing Saudi Arabia to step up, an either cut back or increase supply to keep world energy markets balanced. Balance, in the eyes of Saudi Arabia’s oil ministers, means oil prices above $100 per barrel.

Saudi Arabia is admitting they can no longer shoulder the burden of the inefficiencies of OPEC. The truth is most member nations need to pump oil full out to help fund their economies as well as their social programs. Earlier this month Iranian oil minister Bijan Namdar Zanganeh said at an OPEC meeting that “We will produce 4 million [barrels a day] even if the price drops to $20.”

U.S. energy production is at the highest level in 25 years at 7.6 million barrels per day and climbing. There are many like myself who believe that for the first time in 50 years the United States has a shot at energy independence. Natural gas, shale production, off-shore, alternatives and yes even nuclear can end our dependency on the cartel.

This good news adds support to my view; we are in a secular bull market. Energy independence may even act like a peace dividend and dial up another round of multiple expansion. I told CNBC’s Bill Griffeth on the floor of the NYSE last week, “I believe this is one of the most exciting developments I’ve seen in the last couple of decades.”

OPEC’s 12 members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the U.A.E. and Venezuela. Ending our economic dependency on this region of the world should be an imperative. How many of these countries look like our friends?

– David Nelson, CFA