The Organization of Petroleum Exporting Countries (OPEC) Friday announced a slash in oil production of about 5 percent, or 1.5 million barrels a day, in order to shore up rapidly plummeting prices in a grim global economic environment.
Eleven members of the 13-nation oil cartel, meeting in an emergency session at OPEC's headquarters in Vienna, decided to reduce their current collective production of 28.8 million barrels per day effective Nov. 1.
The move came as stock markets around the world tumbled downward. It is unclear by how much, if any, the projected decrease in oil supplies will affect petroleum prices amid a looming global recession likely to severely dampen demand.
OPEC is gambling that the higher prices it is seeking to create won't accelerate that drop-off in demand.
In a statement released at the close of today's meeting, which was moved up from its original date of Nov. 18, OPEC reported that "the financial crisis is already having a noticeable impact on the world economy, dampening the demand for energy, in general, and oil in particular." The association added that it was responding not only to the drop-off in demand, but also to "a dramatic collapse – unprecedented in speed and magnitude" of oil prices. The lower prices, it added, "may put at jeopardy many existing oil projects and lead to the cancellation or delay of others."
In the US, the world's largest oil consumer, demand for petroleum products in the past month averaged 18.6 million barrels a day, down 8.9 percent from the same period last year, according to the US Department of Energy.
In announcing today's cut, OPEC President and Algerian Oil Minister Chakib Khelil said member countries had no choice but to decrease production.
"What choice do they have – see the oil price go down to the lower levels?"
Mr. Halff notes that members of OPEC, which supplies 40 percent of the world's petroleum, often secretly go over their assigned quotas or fail to reach them because of production problems.
Under the new production regime, Saudi Arabia, the world's largest oil exporter, is supposed to cut its daily output of 8.9 million barrels a day by 466,000 barrels.
Up until recently, Saudi Arabia had been resisting calls from fellow OPEC members for drastic production cuts as oil prices fell dramatically from a record of $147 a barrel in July to less than half that. Prices dipped just below $65 a barrel on Thursday, and hit $63 on Friday.
Riyadh took that stand because its conservative fiscal policies have given it greater insulation from the effects of lowered prices. The government's most recent budget is based on a price of around $50 a barrel.
The kingdom also did not want to be seen contributing to a worsening global economic picture by hiking oil prices. Just days ago, British Prime Minister Gordon Brown said any attempt by OPEC to push up oil prices would be "scandalous."
Analyst Halff also notes that, as far as Saudi Arabia is concerned, lower oil prices are "a tremendous opportunity" because Riyadh "has been concerned about the diminished role for oil in sustaining the world's economy."
Worried that the record oil prices of the past year would accelerate a turn to alternative energy sources, especially in the West, Saudi Arabia had sought to convince its fellow OPEC members to accept lower oil prices.
The recent steep price drops, however, may have softened Riyadh's opposition to a cut.
They certainly gave more leverage to price hawks within OPEC such as Iran, Venezuela, and Nigeria, who have been pushing for lowered production, by as much as 2 million barrels a day, in hope of pushing oil prices back up to around $100 a barrel.
Iran, whose economy is in dire straits, needs an oil price of around $110 barrel to meet its budget, according to figures of the International Monetary Fund.
"What's important to keep in mind," says Halff, "is that there's a wide divergence" of opinion within OPEC and "the interests of its members are more misaligned than they have been in decades."
Only four months ago, run-away oil prices were causing deep rifts between oil producers and consumers. To ease those tensions, Saudi Arabia convened an international conference in its seaport town of Jeddah in late June.
Bucking pressure from other OPEC members then, Saudi Arabia announced an increase of 500,000 barrels a day to ease the price pain on consumers.