The refusal by OPEC to cut production in the face of prices plunging to 5½-year lows shows the cartel is looking to put a lid on the U.S. fracking boom, former Wells Fargo Chairman and CEO Richard Kovacevich told CNBC on Tuesday.
U.S. crude prices were lower again in early Tuesday trading—below $49 a barrel at one point—following Monday's 5 percent drop in New York to lows not seen since April 2009. The price collapse has been pressuring stocks, which saw the Dow Jones Industrial Average fall 331 points Monday, the worst session in three months.
"[OPEC] is playing this game to see how long it's going to last. They want to punish some of the fracking that's going on," Kovacevich said in a "Squawk Box" interview, adding the ball is in Saudi Arabia's court.
He said there's 1 million barrels a day in excess oil capacity on the world market—an amount the Saudis could withstand to cut.
"I was playing golf with the CEO of a major oil company this past weekend and he says a million barrels [a day] in excess capacity is not a lot to absorb eventually in one way or another," Kovacevich continued, making the case for why he believes the crude decrease is temporary. "I think we'll see $70, $80 a barrel oil by midyear."
On the flip-side of concerns about oversupply and weakening oil demand, Kovacevich said there's good news on lower crude prices. "It will improve consumers in the United States. They'll have more money to spend. It's going to be good for 70 percent of our economy."
"You've going to see gasoline consumption increase," he added.
The national average for gasoline, according to AAA's daily fuel gauge report, is about $2.19 a gallon, more than a dollar cheaper than a year ago.
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