Oil is becoming one strange story

So, when oil was selling at $147 a barrel, the word on Wall Street was that we would soon see $200. Retail gasoline was bloody expensive--by American standards--at $4.50 and more. All that was not even three months ago.

Now, OPEC is trying to make sure that there would be some kind of a price floor. While the lowest cost producer, Saudi Arabia, couldn't care, Venezuela and Iran are completely messed up with prices seemingly ready to break through the $60 floor. (I am delighted that Venezuela and Iran are screwed with the falling prices. No wonder Ahmedinejad has sudden health problems now.)

Again, notice how the dollar and oil prices are inter-connected. When it went to $147, the US dollar was at its weakest. Now,as the dollar is gaining ground, and rapidly too, oil prices are falling, and way faster. I don't mean to suggest that the dollar is the only reason why oil prices are tanking--it is an important point to keep in mind.

The Houston Chronicle--home to America's big oil--reports that

Institutional investors and other speculators, who had waded into oil commodities and helped drive up prices to unheard-of heights, have largely fled the scene.
And now oil analysts are left to ponder just how low oil prices can go — perhaps $50 a barrel by the end of next year, suggests Deutsche Bank's Adam Sieminski.

So, now the "experts" will start the bidding war on how low oil prices will fall.
As oil prices fall, OPEC will begin to have a tough time keeping a tight leash on the quotas. Why? Over to James Surowiecki:

OPEC, like any cartel, has perennial problems with cheating. That’s because each individual cartel member wants to produce as much oil as possible, in order to keep raking in the cash, while all the other members cut back, helping to keep prices high. But since it’s in each member’s self-interest to cheat, the cartel as a whole ends up producing more than it says it will. And the real paradox is that the cheating problem gets worse the cheaper the price of oil gets. Since members are making less on each barrel of oil, they have to sell more barrels in order to keep government revenue high. It’s a tough cycle: cheaper oil begets more cheating, which makes prices fall, and so on. This will be a real test of whether the last few good years have made OPEC any more disciplined in the face of bad years.