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.
