The Organization of Petroleum Exporting Countries (OPEC) decided to hold out against further production cuts at today’s meeting, and resolved to enforce compliance with existing reductions.

Obviously dealing with crude oil ($wtic: chart) production is a double edged sword.  Cut production in an effort to drive up prices, and you risk cutting demand even further in these fragile economic times.  Leave production alone and prices could fall further, cutting the economic incentive to bolster reserves.

OPEC has claimed that crude oil prices in the range of $50 to $60/bbl would be ideal, which is down from the $70-90 range that OPEC’s secretary general Abdalla el-Badri levied as appropriate at the end of January.

One positive aspect of a lower price range is that production with higher lifting costs will be shut in, further helping moderate the industry financials as s whole.

The next meeting is in two months on May 28th where the supply-demand analysis may be a bit more clear.

Oil & Gas crude oil, energy markets, energy prices, OPEC

Over the past several months I’ve ready many articles with various opinions on a “reasonable price for crude oil”.  Regardless of the source, or the magnitude of “reasonableness”, I often wonder: what’s so special about that number?

For instance, yesterday OPEC’s secretary general Abdalla el-Badri opined that “$70 to $90 per barrel is reasonable, as that range will support investment in new production”.

Well sure, if that new production costs less than $70 to $90 per barrel to produce.

The argument that el-Badri made was that OPEC controlled as much as 80 percent of the world petroleum reserves, and that they needed to develop that reserve “so we can have more supply to the world”.

I’m not sure that argument holds much weight.  Here’s why.

Ideally you want to have your production costs as low as possible so production is insulated against large price swings.  The lower the production cost, the longer the reserve will make economic sense to produce.

If you have high lifting costs for a substantial portion of your reserves, the the higher the chance you’ll have to shut in production due to the lower than production cost market prices.

The last thing you want to do is continually shut-in wells due to market volatility alone.  The drawback to that is that once prices rise above lifting costs, it will take a substantial amount of time to get production to market.  It’s not like flipping a switch on and off.

As we’ve seen in recent months, the effect of OPEC quotas, and their reduction, is questionable.  OPEC has cut hundreds of thousands of daily production, with no net result on the price of the commodity itself.

So what’s so special about $70 to $90 per barrel?

Ultimately that range makes development of unconventional reserves look more attractive.  However, with the balance of supply and demand shifting the scales in the other direction, raising the price of the commodity just to stimulate supply when demand can’t keep up doesn’t sound like a reasonable solution.

OPEC is set to meet again on March 15, and if crude prices are still hovering around $40 per barrel, you will surely see additional cuts in production.

To what effect will be interesting to see.

Energy commodity prices, crude oil, OPEC, supply and demand

Last Friday OPEC announced a cut of 1.5 million barrels of daily crude oil production as part of an effort to stabilize crude oil prices.  Evidently the commodity did not react as expected, shedding more than 7% more after the news.

It seems that the stability of the global economy is trumping anything OPEC can do to prop up the price of crude.  There is still a lot of money leaving the energy markets, either by force or lack of confidence.

Unfortunately, with every down day in the crude market, the foresight of alternative energy comes more into question. Everyone with a vested interest in developing alternative energy is starting to question the security of the decision to steer to wind, solar and other alternative energy sources.

As the price of gasoline slides, efforts from the likes of GM with the Chevy Volt seem to carry less of a return.

I think in the long run crude oil prices will start moving up again.  It’s just a matter of how long the alternative plays can ride out the dip.

Energy, Oil & Gas commodities, crude oil, OPEC