Opec 'has no other option but to cut production'

The Organisation of Petroleum Exporting Countries (Opec) is leaning heavily towards another production cut, as oil continues to reside firmly below $50 per barrel (Dh183.65).

At this point, Opec really doesn't have any other option but to cut production. No member nations can afford to have crude prices this low.

Justification

So I fully expect they'll announce a 2 million barrels a day, or 7.3 per cent cut, after their meeting this week. If those numbers are accurate, it will be the largest output cut in a decade.

But as I've mentioned in previous columns, the justification for this bargain-basement pricing isn't any more based on market fundamentals than $140 per barrel oil was. And already more industry insiders say that companies are abandoning exploration and infrastructure projects in the planning stages.

And, as I've written before, that is going to mean we'll run into an oil shortage problem down the road.

Sure, steadily growing concern over the state of the American economy as we head into what should be the happiest time of the year for retailers is causing concern that oil demand is going to be down sharply in 2009. Yes, job data for the North American nation was also pretty dismal, with November sporting the largest number of job cuts since 1974.

After flirting with more than $4 per gallon gasoline, Americans - and everyone else - are driving less.

But this doesn't offset the fact that we're heavily into what should be the midwinter heating oil season. And while people may be driving less, they are still heating their homes. Even the driving downturn is going to have some limits. Outside of cities like Chicago, San Francisco and New York, public transportation infrastructure is woefully inadequate. That isn't going to change anytime soon, as most cities and towns are already feeling the impact of the financial meltdown. In short, there isn't enough cash to build public transportation infrastructure right now.

With Americans spread out in the suburbs, they may start carpooling but they are going to have to keep driving.

Just as investors freaked out and helped drive the price of oil sharply over the $100 mark, now they are skittish, understandably. But they are bailing out of a commodity that historically would have proven to be somewhat of a safe haven in a tumultuous market.

Sure, China is feeling the pinch from the US spending less on products made there. But remember how much of a pinch once-smoking India and China were putting on oil supplies just over a year ago? I can't believe they are using so much less fuel.

Nothing I've seen, despite the downturn, says that demand is down as much as current crude pricing would indicate.

But other problems remain. Opec has already cut production once this year, a move which barely budged crude prices. Part of the problem is that member nations have pumped an estimated 932,000 barrels a day over their Opec targets in November. Already Opec Secretary-General Abdullah Al Badri has been a little blunt about needing to correct non-compliance.

But with everyone from the UAE to Qatar needing at least $55 per barrel to meet budget needs, I have no doubt Opec will feel forced to look at cuts again in the future if the price doesn't rebound to reasonable levels.

- The writer is a journalist based in Alaska, USA.