An OPEC Cut That Doesn’t Count

OPEC said it would cut oil production by 1.5 million barrels a day. Its normal output is about 32 million, so in most cases since the embargo in 1973/74, that would mean a lot. It might take crude up 10% or 20%. In this recession, it will hardly matter at all.

OPEC knows how deep the current recession is. The cartel does not want to drive prices up too much. It simply wants to keep them from falling. If it can keep crude around $70, its members can get by, even if the salad days are over

OPEC would also prefer not to deepen an economic slowdown. It doesn’t want to be blamed for millions of people losing their jobs. It does not want the burden of drops in sales for everything from cars to bottles of beer which might be caused by higher gas prices.

OPEC is also aware that there is no guarantee countries such as Russian and Canada will follow its move. If supply levels only drop modestly, the cartel’s actions may not mean much. It needs to appear moderate so that the other 60% of the oil production facilities across the world do not simply open the gates and keep the crude coming.

OPEC may be at great risk of surviving. Ironically, it has great power when the economy is strong. China needs it to fuel growth. America needs it for all those cars it sells and all those shoppers going to malls.
In a recession, OPEC becomes a eunuch. If things in the global economy stay bad, it may never recover to its previous state.

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Douglas A. McIntyre