OPEC – It Cuts Both Ways. Oil Prices to Continue Falling

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Crude-oil futures tumbled 6% to below $70 a barrel in New York, despite widespread expectations that the Organization of Petroleum Exporting Countries (OPEC) will reduce production at an emergency meeting later this week. Normally a planned cut in the crude oil supply would drive up the price of oil and eventually the price of gas at the pump. But the weakening economy, falling corporate earnings, rising US dollar and disagreement over the extent of cuts has continued to further pressure oil prices. The domestic demand side profile has also fallen significantly with total U.S. petroleum consumption projected to fall 830,000 barrels a day this year from 2007.

OPEC is in a real conundrum. Even if it’s members agree to cut production, non-members of OPEC or its own disgruntled members (looking for short term profits) may seize the opportunity to increase their production thereby neutralizing the planned cutbacks. And the cartel must be careful not to harm increasingly fragile economies in major oil-consuming nations. “Japan, Europe, and U.S. are in a bad place, China is slowing faster than expected,” and OPEC producers could be blamed for exacerbating an economic slowdown, one trader said. “Its going to be very interesting.” For now though I think OPEC (which accounts for 50% of global oil production) moves are going to be irrelevant and oil prices in the near term will face continued downward pressure, potentially falling under $50 a barrel if the current trend is any guide.

In the mean time, gas prices will continue to fall at the pump (now below $3 a gallon in most areas) and dissipate energy inflationary pressures. Longer term though oil prices will rise, but for now the respite in these troubled economic times is welcomed. One good thing to emerge from high oil prices in the recent past is the changing habits of American drivers towards smaller and more fuel efficient cars. It also prompted the government and presidential candidates to really focus on alternative energy plans and sources. I just hope this momentum is not lost as the threat of high oil and gas prices recedes for now.

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