OPEC Cuts Production

As expected: OPEC Production Cut Could Send Gas Prices Higher

The OPEC countries agreed Wednesday to proceed with a 4 percent cut in oil production beginning Thursday, turning aside criticism from industrial countries that any resulting price rise will harm the world economy.

With oil prices emerging as an election year issue, the White House called the move disappointing and said that administration officials were “actively engaged” with OPEC governments about it.

Oil ministers from the 11 member states, meeting in Vienna, upheld a February decision to cut production by 2.5 million barrels a day on grounds of avoiding a price-deflating build-up of oil supplies in world markets. But some oil industry analysts said any price rises could be blunted by drops in demand as warmer weather arrives and by continued cheating on official quotas as member countries try to maximize their incomes while prices remain near 13-year highs.

Following news of the decision, White House spokesman Scott McClellan said that “producers should not take steps that harm American consumers and our economy.” President Bush has not called OPEC leaders about the issue, McClellan said, but officials in his administration are in touch.

What’s odd to me is that many OPEC members are also part of the WTO. The cartel, and certainly this restraint of free trade, are in clear violation of WTO guidelines. One would think a case could be won against them in the WTO.

Of course, this is almost always the case with cartels:

The question in the oil markets now is how seriously the cartel will enforce the cuts. The cartel is historically undisciplined. Year after year, members have pledged to each other to produce only a set volume in order to keep world prices at certain levels, but privately they sell more to gain a windfall.

Oil prices fell by about $1 per barrel in the hours after Wednesday’s announcement, as traders interpreted the details to mean that much of the cut would be illusory. “There isn’t much credibility,” said Marshall Steeves, an energy analyst at Refco Group, a New York-based financial services firm. “Overproduction or cheating — call it what you want — has been quite rampant in the last few months.”

So it goes with a group of thieves. Still, it would be nice to put them out of business.

FILED UNDER: Economics and Business
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Delta Dave says:

    Seems to me what held OPEC prices in check in the past was the threat of making the development of alternative fuels feasible. The 70’s brought us “gasohol”, didn’t it.

    By pushing gas price up, they are again inviting American genius and innovation to come up with permanent solutions to foreign import problems.

    Already the HOV lanes are stuffed with these hybrid fuel cars. Once we set a national will to solving this dependency, it will be irreversible for OPEC…but, China and Iraq will probably take up the potential slack in consumption

    But part of the problem is home grown…the environmental wachos have prevented any new distillation facilities from be build in the US in decades. Our existing facilities are wearing out and are becoming obsolete.

    Synthetic fuels are definitely becoming more attractive…and GM, FORD etc. will ensure they are available when it starts to impact sales.

  2. Idler says:

    Delta Dave- correct and correct. I would add that the idea of drilling the sacrosanct ANWR is going to have to be put on the table in the not too distant future, if it ain’t already there.

    And of course, windmill farms off the east coast.. ask fat ted kennedy and jfkerry about that alternative fuel source.