Additional OPEC Cuts in the Works?
November 5th, 2006 by Grant in: Economics, Energy, Oil & GasA recent article on MSNBC suggests that production cuts directed by OPEC may not be sufficient to firm up a soft market.
OPEC President Edmund Daukoru stated that “$60 will not hurt the world economy,” while crude oil ($WTIC: chart) closed last week at just over $59 per barrel.
As of November 1, OPEC mandated a cut of 1.2 billion barrels per day, however there is speculation as to whether the follow through of such a mandate will be met.
It seems hard to believe that cuts that went into effect just 4 days ago have had time to filter down through the market. At least to a point to tell whether the existing cut in production has achieved the desired results.
I agree with the need to keep oil prices at elevated levels, but for reasons other than what many oil-rich nations would agree with.
Venezuelan Oil Minister Rafael Ramirez said that OPEC’s strategy was to maintain at least $60 a barrel, and that it may need to cut another 300,000 bpd in December to do so.
Iran’s Oil Minister Kazem Vaziri Hamaneh said that a price below $60 was unacceptable due to the rising cost of production.
Personally, I don’t see the rising cost of production as the reason to keep oil above $60. Sure, production costs are rising, but not to a level that $60 is a break even point. Even Exxon’s financials (XOM: chart) will show you that it’s fairly easy to make money at $60 oil.
While Iran and Venezuela want to keep prices high for production reasons, I see the need to keep prices high for economic reasons. The higher oil prices continue to press the incentive to alternative energy development.
A thought both Iran and Venezuela would surely frown upon.
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November 6th, 2006 at 11:30 am
Grant-
Glad you agree on the need to keep oil prices up. As I wrote last week:
http://www.evolutionshift.com/blog/2006/11/02/opec/
I now support all the efforts of OPEC to limit production or raise prices. Americans now perceive dependence or foreign oil as the number one issue in the area of National Defense. This is a good thing as it adds to the economic incentives to find alternative sources of energy and to find and utilize conservation technologies.
Good post.
David
November 12th, 2006 at 11:11 am
I agree, too, David. Need to keep the black gold high to drive down consumption. Isn’t this the fundamental theory of supply and demand?
I also agree with Grant driving down demand is what motivates OPEC to cut production. I think they want to keep the prices high out of greed.
Either way we win because it forces us to continue developments of alternative energy, and I can see us being forced into pushing these developments through to the market as long as gas prices contiune to keep us away from the pump.