BALTIMORE, MD-Oil prices have fallen nearly 25% from the record of $78.40 a barrel set back in mid July, causing some folks to reconsider trading in their gas-guzzling SUVs. But falling prices haven't just caught the attention of consumers.
In an attempt to curb a precipitous fall in crude prices, OPEC, which produces just over a third of the world's oil, today announced that it will in fact cut back its total daily output by 1.2 million barrels a day (MMbbls/d). This is the cartel's first production cut in over two years.
The reduction, scheduled to begin November 1, represents 4.3% of OPEC's total daily production for September and was 200,000 bbls/d deeper than previously announced.
This trims OPEC's daily output to 26.3 MMbbls/d.
There's also some speculation that a further cut of 500,000 bbls/d could follow when OPEC meets in Abuja in December to combat high fuel stocks and a projected drop in demand for oil in 2007.
US crude oil inventories surged 5.02 million barrels to 335.6 million last week. This was the biggest increase since March, leaving stockpiles 8% above those of a year ago and 14% higher than the five-year average for the week.
But the $64,000 question now is whether or not OPEC members are really willing to comply with the new quotas.
Will history repeat itself and members continue to overproduce? It appears as if the market has already answered that question for us.
Oil prices closed back below the $60 mark today at $59.47 a barrel, a loss of 2.2%. Take a look . . .
Although the cartel's top producer, Saudi Arabia, has allegedly agreed to shoulder 32% percent of the cuts-380,000 bbls/d-I doubt that they or any other OPEC member are seriously planning to make the cuts.
The fact is, OPEC and its members stand to lose a heck of a lot from lower oil sales. This is particularly true for countries that have heavily invested their petrodollars in building up their oil sectors.
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Countries like Nigeria, Libya, Algeria and the United Arab Emirates have spent countless hours and millions of dollars courting international energy firms looking for help boosting production.
Qatar, Indonesia, Venezuela and Iran also have much to lose, as they have international oil companies working in their fields as well. A production cut means these countries will have to tell the likes of Royal Dutch Shell, BP, ExxonMobil and Chevron to reduce output and forgo revenue . . . something no major firm wants to pass on to their shareholders.
The seriousness of OPEC's resolve to cut production will only become apparent in the next two months.
OPEC has a long history of "creative bookkeeping" when it comes to reporting production figures. And I wouldn't be at all surprised if some members cheat by not cutting their full share or deciding not to cut production at all.
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