OPEC Announces 2.2 Million Oil Barrel Cut
In a bid to boost sagging oil prices, the cartel announced its largest cut yet.
Dec. 17, 2008 — -- OPEC has announced it will cut 2.2 million barrels from its daily oil production, the largest proposed reduction in the cartel's 48-year history.
The announcement follows a steep decline in oil prices in recent months as the worldwide economic slump has dragged down energy demand. The news failed to boost oil prices -- crude oil fell more than 7 percent to below $40 per barrel on Wednesday.
Officials from the Organization of Petroleum Exporting Countries, who are currently meeting in Oran, Algeria, want to cut production to raise prices, which have collapsed from as high as $147 a barrel earlier this year.
"Supply is still somewhat in excess … inventories are also higher than normal," Saudi Arabian Oil Minister Ali Al Naimi told reporters. The cut, he said, would "bring things in balance."
The cut was prompted by concerns of dropping demand for oil in the world's largest economies, underscored by OPEC's monthly market report for December, released yesterday. That report cited a drastic drop in oil demand through the middle of 2009, with the mature economies of the OECD declining an average of 1.3 million barrels per day year on year.
"The impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices, which have fallen by more than US $90 a barrel since early July 2008," OPEC said in a statement on the output cut.
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"If unchecked, prices could fall to levels which would place at jeopardy the investments required to guarantee adequate energy supplies in the medium-to-long term," the statement continued.
This month, Merrill Lynch predicted oil would drop to $25 per barrel next year if the global recession spread to China -- a sharp contrast to OPEC's ambitious target of $75 per barrel, set by Saudi Arabia last month.
The new cut, in combination with other production cuts announced by OPEC in recent months, means that the cartel will reduce its output by 4.2 million barrels since September. But trying to influence market prices through the traditional lever of supply could backfire, say analysts, who warn that supply constraints could lead to a deeper recession and demand-driven drop.
"If OPEC cuts too far it risks undermining demand even further at a time when the global economy needs moderate oil prices," said the Center for Global Energy Studies in London.
Experts also voice concern that OPEC may fail to police its own cuts, leaving room for members to produce above quota. CGES data for the November shows 11 of 13 OPEC members were failing to comply with their quota reductions, as set within the October output cut of 1.5 million barrels per day. Iraq is the one member exempt from quotas as it recovers from years of economic distress.
OPEC producers account for roughly 40 percent of world oil supply, and the cartel has acknowledged it needs the help of non-OPEC producers to bring prices back where they want them.
Russia, which rivals Saudi Arabia as the world's largest oil producer, accepted an invitation to the meeting and has suggested it would support OPEC's production cut with a cut of its own. Over the past few months Russia has been in discussions with OPEC toward closer cooperation, reportedly holding talks at today's meeting on joining OPEC as a full member -- a move some analysts see as another sour note in Russia's relations with the West.
