By the Pricking of My Thumbs
This morning OPEC has announced a plan to cut oil production by 1.5 million barrels a day:
VIENNA — The OPEC cartel said Friday that it would reduce its oil production by at least 1.5 million barrels a day to stem what it called “a dramatic collapse” in oil prices as the world economy slows down and oil demand shrinks.
The reduction, which is the deepest since 2003, was announced at an emergency meeting here and will come into effect on Nov. 1, according to Ali al-Naimi, Saudi Arabia’s oil minister.
But OPEC’s announcement, which exceeded what many experts had expected, failed to slow the downward spiral in prices. After the meeting, oil futures in electronic trading in New York fell as much as 7 percent to $63 a barrel, their lowest since May 2007. Oil prices have been more than halved since peaking at $147 a barrel in July.
The decline came as stock markets around the world suffered another dark day following bleak corporate earnings. The FTSE 100 in London slipped by more than 7 percent. In New York, futures also pointed down.
There’s something seductive about a sudden rise in income. Despite any determination to keep living the same way you did before the windfall inevitably you begin living in a way befitting your new income. What was once a luxury has now become a necessity.
That’s the fix that oil-exporting countries, including Russia, Iran, Venezuela, and Saudi Arabia, find themselves in. They’ve become very accustomed to all of those lovely petrodollars and they don’t want to let go of them. So even as consumption sags under the weight of economic downturn, they’re attempting to raise the price by reducing the supply. That this requires members to forego current income in favor of hoped-for increases and, if successful, will further slow their customers’ economies does not seem to be of overwhelming concern to them.
OPEC is engaged in a perilous game. Falling commodity prices have been one of the only positive signs in a profoundly depressed economic landscape. Even China, long the main engine of oil demand growth, is showing signs that its economy has hit a speed bump.
“They are walking a very, very fine line,” said Jan Stuart, an energy economist at UBS in New York.
The last time oil prices fell below $50 a barrel was at the end of 2006, prompting the Saudis and other producers to engineer two deep cuts, totaling 1.7 million barrels a day. The strategy worked, and helped set the stage for last summer’s price run.
When is a 300-point plunge a relief?
Wall Street was pondering that question on Friday as stocks in the United States picked up a sharp sell-off that began in Asia and Europe. But before theopening bell, things appeared much worse.
Stock futures, essentially what investors are betting will happen after the bell, fell so sharply that their trading had to be halted on Friday morning. The size of the declines had reached a set limit, with futures on the Dow Jones industrial average down by 550 points.
Concerns about oil prices aren’t the only things spurring this downward move. Even more important are dismal corporate earnings reports, these pushed down by flagging consumer spending. The slowdown is global, suggesting that the downturn might be a lengthy one.
Something wicked this way comes.