The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Limits of Logic

02/16/2016

Some of us are expected to be mind-readers at best or soothsayers at worst.  Because of that, we are usually more forgiving when others in our profession are proven wrong . . . unless it is the legendary Goldman Sachs, of course.

On January 28th, Russia called for talks with other oil-producing nations to limit production in order to raise the price of oil.  Goldman Sachs promptly announced it would never happen, because Saudi Arabia will never forgive Russia for lying and cheating on similar agreements in 2001 and 2008.  Russia argues truthfully that it cannot cut production in a frigid Siberian environment as easily as oil wells in hot deserts can be closed, but hides behind that fact to cheat.  Plus, it is not in Saudi’s best long-term interest to get oil prices higher yet — not until they have driven U.S. shale-oil producers out of business.

Their logic was completely valid, but guess what was announced this morning?  Saudi Arabia will indeed enter into talks with Russia and other oil producers to freeze production at January levels.  Sorry, Goldman!  Good logic, bad call.

But, do these talks mean anything?  No!  One reason is that January levels of production would be frozen, which is still way too high – the oil stored in tanks would continue to increase, which holds oil prices down.  Another reason is that U.S. producers would not enter into the agreement, which would increase our market share, albeit at low prices.  The most important reason, of course, is that Iran would not agree, as their oil production has been held off the market for many years and they need to increase production as rapidly as possible.  Lastly, it is not known if there are any honest, reliable members of OPEC or the non-OPEC producers that would not cheat.

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