According to its website, OPEC cuts production by 1.2 million barrels per day (mbpd), even more than the rumored 1.0 mbpd, effective 1 November 2006. I suspect the additional 200 000 barrels is an attempt to signal to the market that OPEC means business. Unfortunately for OPEC, it has a notoriously poor record of actually following through on production cuts. However, in prior years OPEC had plenty of surplus capacity. Now some countries are unable to fulfill their current quota. In fact, Indonesia is a net importer. And prices are much higher. For those reasons, I expect the production cuts to stick
In September OPEC supplied about 29.8 mbpd according to the International Energy Agency. Thus a reduction in 1.2 mbpd is slightly over 4%.
If OPEC believes that the $60 per barrel price (or thereabouts), then holding the line makes sense. It can continue to receive high oil prices and simply wait for demand creep to remove the surplus. If OPEC believes, however, that the current prices will not be maintained, then it should not reduce output and simply let prices fall. Lower prices for a year or two would stall or cancel some larger projects that are being contemplated. Thus, OPEC must be confident that these prices can be maintained.
I believe that oil has broken free from its historical long run real price of $20-25 per barrel. I am doubtful that we will enjoy oil prices less $50 per barrel for a sustained period. Higher energy prices are here to stay.
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