For those of us who were dying for relief from record high gasoline prices this summer, the recent drop in oil prices comes as great news, but this is not the case for everyone. OPEC, which supplies the world with roughly 40% of its oil, would like to see prices rise higher again, and today gave a clear sign that larger than expected production cuts are on the horizon.
In an interview today, the President of OPEC, Chakib Khelil, stated that a consensus had been reached for cuts at the next meeting of the oil cartel. The next scheduled meeting is on December 17, and according to Khelil, the market will be surprised.
Khelil stated that the he felt the best way to get a quick boost in oil prices is to shock the market, and he felt that the upcoming production cuts would be able to do just that. While he did not indicate exactly how large the production cuts would come, he left no doubt that they will be substantial.
"The stronger the decision, the faster prices will pick up," Khelil said.
Some analysts are already predicting that we are going to get a 2 million barrel a day reduction, but based on the comments from the OPEC president today, the cuts could be much larger than anyone has been expecting. Keep in mind that OPEC cut production by 1.5 million in October, but this did not have the effect that they desired, so this time around the number could be much, much larger.
Oil, which is currently trading at a four-year low, closing at $40.81 yesterday, is well off its highs from earlier this summer when it was inching its way up towards $150.
Whether OPEC will be able to curb the drop in oil prices remains to be seen, but it acknowledges that its decisions alone will not be enough to move prices higher in the face of a slumping global economy. OPEC does hope that oil-rich Russia will follow its example and put a crimp on its oil production as well.
So what exactly does OPEC consider to be a fair price for oil? According to Khelil, OPEC would like to see oil priced at $70 a barrel.
As with anything, it is a tricky situation to gage just what fair means when it comes to oil prices. If prices go too high, they will put a crimp in oil demand; if they are too low, they will effect the amount of investments oil producers will be willing to put into exploration and development. Maybe $70 is the magical number that will put things back into equilibrium.
Let's take a closer look at what it is exactly that OPEC is trying to deal with, you can get a better idea of what oil prices have been doing by looking at the following chart:
What about you? What do you feel would be a fair price for oil?
You may also want to take a second to read this great post by Joseph Lazzaro that discuss his thoughts on OPEC, and mistakes it made to help get us into the situation that we are currently facing.
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.
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Reader Comments (Page 1 of 1)
12-06-2008 @ 2:16PM
Ann said...
If we keep pressing on with conservation and saving our own economy by not using carbon fuels, it will not matter how much OPEC cuts their production.
12-06-2008 @ 2:22PM
shinseiromeo said...
Is this seriously even legal? "We aren't making enough money, so we're going to intentionally cut supply to create a false demand." Plus this just screams: "TERRORISTS ATTACK US NOW SINCE WE ARE TELLING EVERYONE WE ARE ALREADY CUTTING OUR SUPPLY SIGNIFICANTLY".
12-06-2008 @ 2:57PM
Badabing said...
OPEC can bl*w me. They have made billions and continue to make money, but they don't want to trade their Rolls Royces in for a Mercedes. They're greedy, and will support economic terrorism to get what they want. They need to wake up, for without the USA- they'll be back to riding camels!
12-06-2008 @ 3:11PM
Ana said...
Wow, I was just thinking of this trick in the bag, in my way to the office this morning and here it's. Can't fool us anymore. Welcome to the real world, if you inflate prices, you better take a bath in your oil world wich is in reality our resources. We are soon going to walk as it's better for all.
12-06-2008 @ 3:57PM
john said...
Hell with opec we don't need them period.
We don't need the rich ass investers either we need a goverment that takes care of the people of the USA not other country's and them selves.
They need to serve the people like there getting paid to do, not making them selves rich from the poor.
You know most of the GO are millioniars that don't care for know one but them selves.
12-06-2008 @ 4:02PM
Starvine said...
We need to read the writing on the walls NOW and avoid the temptation to return to the gas-guzzlers. If we keep consumption down and pour money into alternative fuels, we can give to proverbial middle finger to OPEC and their greed.
12-06-2008 @ 4:28PM
blogs11111 said...
Nervy of them to say the least. Guess Dec. 17th is the day all Americans need to park their car in the garage and take public transportation. Fill up those buses that run whether we're on them or not. Walk, ride a bike or if possible just stay home. Turn the thermostat down further. Whatever it takes we just can't let OPEC win this. Oil should be at $30.00 a barrel and stabilize there don't quit fighting back until this level is achieved.
12-06-2008 @ 5:14PM
EMIL J KOVACH JR said...
December's OPEC Meeting, And Announced "Cut Backs" Is More An Attempt To Show Solidarity Within The Producer Community,SAUDI ARABIA Does Indeed Live Up To It's Commitments, But Also Understands, Others, Most Likely, Will Not. The Reality Is--Saudi Arabia Will--For Go Some Of It's Production, For Others, To Balance Income To The OPEC Community, For Others That Need It.
And Help Stabilize The Market Price.
Most Members Realize The Market will Ultimately Set the Price, The Availability Of The Product, Will Not Be Less, Despite Published Inventory Reports, It Has Always Been that way
EMIL J KOVACH JR
12-08-2008 @ 12:44AM
Justin said...
From 1986 up until 2004 the average price of a barrel of oil inflation adjusted was anywhere from $15 up to $37 per barrel Avg. for the year. I don't know what the big deal is. Prices will settle back in that range because that is what the market will bear. OPEC made their money, now they can live on that for the next 20 years! $70 a barrel! LOL! Keep dreaming!
12-08-2008 @ 5:51PM
Thomas said...
My opinion is that the $4 a gallon gas prices during the summer caused most of the mess we are in now. People realized that because of high gas prices, they had to cut back on other non necessities. This caused a drop in spending and then the housing bubble callapsed which made the whole economy much worse. After that we had the bank failures and pretty soon the auto industry will go. Everyone is cutting here and there and companies arent selling as much because people are now afraid and have started a saving trend. This is actually good but does not fair well in an economy that depends on people to splurge and buy a new ipod every year. And because of the drop in manufacturing, all our friends in asia arent pushing out as much products thus a global recession. OPEC created this mess by not curbing prices when they were high. If they were not willing to put a ceiling on prices, then the consumer is not going to allow them to put a floor on the other end of pricing. If they need price to be $70 a barrel, then they should have marked it as that to begin with like everything else on the market. Cars, food, and hotel prices have never fluctuated so widely in the past (only during hard economic times). So this whole mess is their fault and they should take responsibility and fix the global problem that they started.
1-04-2009 @ 8:12AM
JK Chamberlain said...
Lets create a food shortage and see who REALLY has the upper hand.