On Friday, October 24, the 13 members of the Organization of Petroleum Exporting Countries (OPEC) announced their decision to cut production by 1.5 million barrels a day effective November 1, 2008 (11 of the 13 members are slated to participate in the reduction). OPEC’s stated purpose for the cut is to reduce the oversupply of oil in global markets and stem the free fall in oil prices (prices are currently some 57 percent lower than in July of this year). OPEC’s decision was not taken lightly, as members are also fearful of contributing to a more catastrophic decline in global economic activity that would likely suppress oil demand for years to come.
Substantially revised projections of global economic growth, and consequently oil consumption, when coupled with current oil output have combined to create the prospect of a growing oil surplus. Recent projections on the need for OPEC crude for the next two calendar quarters suggest a “call” on OPEC in the range of 30.4 to 31 million barrels per day (mmb/d), yet OPEC’s September output is estimated to have been above 32.2 mmb/d, so the 1.5 mmb/d target reduction was not unexpected. Despite the OPEC announcement, however, prices have continued to fall, indicating a high degree of skepticism that either the cut will be sufficient to stem the decline or that OPEC members’ discipline in meeting the reduction targets can be assured.