OPEC Finally Comes To Its Senses, Prepares Production Cuts

December 6, 2008 by Douglas A. McIntyre

Tx00338coilwellgusherodessatexasposOPEC is sending strong signals that it will cut production ASAP before Venezuela and Iran have to file for bankruptcy and Putin is thrown into irons for ruining Russia’s economy. (Russia is not an OPEC member, but might as well be.)

With oil moving toward $40, down from $147 just this last summer, members of the cartel have seen remarkably sharp drops in their national incomes. Russia may well lose some of its military and geopolitical power. Invading Georgia may simply be too expensive, although the price of gas for tanks and personnel carriers will be down.

Many analysts expected OPEC to raise rates at it meeting last month. The fact that it did was surprising.

Production may be about to drop and drop very sharply. "A consensus has formed for a significant reduction of production levels" by the 14-member Organization of Petroleum Exporting Countries, OPEC President Chakib Khelil told The Associated Press. The next meeting is December 17.

Cuts could be as large as two million barrels a day. Whether that will be enough to push oil above $70, a level that many members say they need to keep their countries "profitable" is hard to say. The recession is causing the demand for crude to fall sharply, particularly in large consuming nations including China and the US.

If the cut does not move prices way up, OPEC can always come back for more.

Douglas A. McIntyre