Sunday, October 26, 2008

No Surprise Here: OPEC Cuts Production at Emergency Meeting

Sources: Lower Oil May Serve Some OPEC Interests: LCM's Morse, Reuters; OPEC Says It Will Cut Oil Output, New York Times

In response to the massive drop in U.S. oil prices over the last three months accompanying the credit crisis, the Organization of the Petroleum Exporting Countries (OPEC) held an emergency meeting on Friday in Vienna. Although many economists expected a reduction of about one million barrels per day (bpd), OPEC announced that it would reduce output by 1.5 million bpd starting November 1st.

However, the action failed to halt the price decline, as oil continued to drop by more than five percent after the announcement. If oil prices continue to fall, OPEC’s president, Chakib Khelil, has suggested that more production cuts are likely.

The stunning decline in oil prices, from a record $147 a barrel in July to below $69 last week, has left members of OPEC fearful that they will have to cut government budgets if they fail to cut production. Specifically, Venezuela and Iran were pushing for a bigger daily reduction, of two million bpd. However, OPEC’s core Gulf producers favored a reduction of one million bpd, as they have stated that they do not want to add to the problems facing the global economy. In conjunction with the Gulf States, Saudi Arabia may see lower oil prices in their interest for awhile despite the economic hit their oil-reliant economies might take.

Discussion: OPEC cites the strained global economy as the reason for its cut in production, but if OPEC’s decrease in output eventually sends oil prices higher, wouldn’t that be another blow to the global economy? If so, would it be better for the economy if OPEC were to refrain from cutting production? Do you think that Venezuela and Iran, considered enemies of the U.S., were pushing for a steeper reduction in output to spite Americans at the pumps, or were they solely acting in their own self interest? Why do you think that the Gulf States and Saudi Arabia, often considered allies of the U.S., were less enthusiastic about large cuts in output?

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