OPEC, Madoff and the Big 3

Brian Hicks

Written By Brian Hicks

Posted December 19, 2008

You may have heard about financier Bernard Madoff and his house of cards that just came tumbling down. In addition to being the most brazen and costly Ponzi pyramid schemes in recent memory, Madoff also showed us how far unadulterated trust can be taken.

The Madoff scandal unfolding also brings to mind other houses-of-cards in the investing world.

For one, how about the price of oil and how many alternative fuels depend on costly crude?

German renewable energy industry leaders met this year with national officials to discuss methods to bolster that country’s worried renewables sector. Pricing subsidies are coming down from the government’s end, and orders are being delayed by solar power and wind project planners, since much of the money and financing needed to go green have evaporated.

Enter OPEC, which on Wednesday announced a 9% output cut that exceeded most estimates. That followed the Fed’s rate cut surprise on Tuesday, and set us up for a potential twin rally in oil and stocks.

Unlike the Fed, though, OPEC has more wiggle room moving forward:

"OPEC is sending a message that they are trying to cut pretty seriously," Mike Wittner, head of oil research at Societe Generale SA in London, told Bloomberg. "If they need more cuts, there will be more cuts."

The main question now is one of confidence in a broader equity market shaken by subprime and schemers like Madoff.

Will buyers get back into stocks, especially clean energy ones, if oil prices float back upwards, or will trepidation keep most of the money on the sidelines?

That question will probably not be resolved until after Barack Obama’s inauguration. At that point we’ll have a clearer picture of what a U.S. stimulus will look like and how it will affect energy demand. We will also know if OPEC output levels will stay lower in anticipation of demand destruction in the U.S. market.

The Big 3 seem to be pinning their political and economic survival on efficiency, which means not as much oil demand. Add that to general economic weakness and OPEC is likely to make "demand security" its go-to buzzword for the foreseeable future.

Stay tuned.

Sam Hopkins

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