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With oil prices tumbling, the Organization of Petroleum Exporting Countries (OPEC) is really caught between a rock and a hard place.

On the one hand, lower energy prices are the one bright factor on the economic horizon because they translate into lower costs all round.

On the other hand, with oil prices having fallen by over 50 percent from $147 a barrel in July, you got to think that the OPEC countries are really feeling the squeeze.

So when OPEC, which produces about 40 percent of the world's crude, decided Friday to cut its production by 1.5 million barrels a day to 27.5 million bpd, it was conducting a balancing act between stabilizing prices and shoring up the domestic budgets of member nations.

The question is whether it will stabilize prices, which is what OPEC wants, or whether it would drive prices up, which is the last thing the world economy needs right now.
Indeed, if the OPEC cut were to push prices up too much, the global recession could be even worse and that would lead to reduced demand for oil. And that would not be in OPEC's interest.

But OPEC nations have to be suffering with the 50 percent-plus falloff in oil revenues. Indeed, Iran and Venezuela wanted a cut of 2 million barrels a day.

So they have to balance between stabilizing prices to make up for reduced output while keeping prices low enough not to adversely affect any glimmer of economic growth around the world.

And given that the organization was cheating on its prior production level by an estimated 300,000 barrels a day, one wonders what effect the 1.5 million barrels a day cut will have.

Indeed, the market apparently did not put much store by it, with prices falling to about $64 a barrel Friday.

- Peter C.T. Elsworth

 Tags  Commentary oil prices OPEC

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