Despite Deeper Cutbacks in Production, OPEC Can't Stop Collapse in Oil Prices
World Demand for Oil Continues to Drop as Global Recession Deepens; Prices Sink to 4 1/2-Year Low Despite Slash in OPEC Output By Record 2.2 Million Barrels a Day; Americans Continue to Turn Away From 'Gas-Guzzlers' in Drive to Cut Back on Fuel Consumption
The headquarters of the Organization of Petroleum Exporting Countries in Vienna, Austria. OPEC ministers met Wednesday to slash daily crude production by 2.2 million barrels. But despite the cutbacks, world oil prices -- which have been in free fall since September -- kept right on plunging, hitting a four-and-a-half-year low of $40.06 a barrel. Still outraged by gasoline prices hitting a peak of more than $4 per gallon in July, U.S. consumers have cut back sharply on their fuel consumption in a determined effort to force prices down. (Photo: Getty Images)
(Posted 5:00 a.m. EST Thursday, December 18, 2008)
==============
SPECIAL REPORT
==============
By ROBIN PAGNAMENTA
The Times of London
Oil prices slipped to a four-and-half-year low Wednesday, even as the Organization of Petroleum Exporting Countries (OPEC) announced its largest-ever production cut -- totalling nearly five per cent of global output -- in the cartel's latest effort to bolster prices.
At a meeting in Oran, Algeria, OPEC oil ministers said that it would slash supplies by a further 2.2 million barrels a day to 24.84 million barrels, effective January 1. The cut exceeded Opec's previous record cut in 1999 of 1.7 million barrels.
Chakib Khelil, OPEC's president and the energy minister of Algeria, said that the latest cuts had brought the total reductions announced by the cartel since August to 4.2 million barrels a day, or just under five per cent of global production, which averaged 86.3 million barrels a day during the third quarter of this year.
"The impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices," OPEC said in a statement justifying the action.
Nevertheless, oil traders remained unimpressed, with some questioning whether all OPEC members would comply with the steep cuts -- a continuing problem for the organization.
After the announcement, the price of a barrel of benchmark crude in the United States quickly dropped to a low of $40.20, its weakest level since June 2004.
ANALYST PREDICTS OIL PRICES WILL FALL EVEN FURTHER
With demand collapsing, as some of the world's biggest economies enter recession and amid growing signs that Chinese oil consumption is also weakening, crude prices have plunged by more than $100 since July, when they briefly touched a record of $147 a barrel.
Andrew Horstead, an energy analyst for Utilyx, Ltd., predicted further price falls below $40 unless other countries, particularly Russia, joined forces with OPEC with production cuts of their own. "The demand numbers coming out of the U.S. are incredibly weak, so I doubt if this will be enough to push prices higher on its own," he said.
Earlier, there had been speculation that Russia and Azerbaijan, which are not OPEC members, would join in with the co-ordinated action and make cuts amounting to 600,000 barrels per day.
John Hall, an independent oil analyst, said that these represented a “token gesture” because both countries were already reducing production for reasons such as a lack of investment and were dressing these up as collaborative market action with OPEC. "The real problem OPEC has is one of compliance," Hall said. "The market just doesn't believe it can demonstrate its members are going to follow through in full."
Khelil rejected claims that some members might choose to produce more than their quotas. "I can tell you it's going to be implemented and it's going to be implemented very well because we do not have a choice," he said. "If not, the situation is going to get worse."
OPEC, which was formed in 1960 and whose 12 members include Saudi Arabia, Iran, Iraq, Nigeria and Venezuela, produces about 40 percent of the world's oil supplies.
WHITE HOUSE PROTESTS OPEC PRODUCTION CUT
The cartel's latest round of production cuts were condemned by the Bush administration. White House spokesman Tony Fratto said that the cuts risked further undermining an already fragile global economy. "OPEC has an obligation to keep the market well supplied and to consider the health of the global economy, so efforts to limit the benefits of lower energy prices are short-sighted," Fratto said.
Oil exporting governments are struggling to deal with the rapid collapse of oil prices, which is undermining their public finances. Saudi Arabia, OPEC's biggest producer and de facto leader, said last month that it was targeting $75 a barrel, which it considered a fair price for oil. Other members, including Venezuela and Iran, have been pushing for higher prices.
Average prices for regular-grade gasoline nationwide in the U.S. have plunged from a peak of $4.10 per gallon in July to an average of $1.67 per gallon now, according to the Web site GasBuddy.com.
In Britain, average prices have fallen to their lowest level since March 2007, according to the Automobile Association of the United Kingdom, to 89.5 pence per liter ($1.38 per gallon). Diesel fuel, helped by hefty cuts by supermarkets, fell to 1.02 pounds per liter ($1.58 per gallon).
A British family with two cars is spending 64.77 pounds ($100.59) less per month on fuel than it did last summer.
OIL DEMAND IN THE U.S. LIKELY TO BOTTOM OUT -- AND STAY FLAT
OPEC's efforts to turn the oil market around have traditionally been like steering a supertanker. It is a lengthy process.
Historically, the price of oil has been closely correlated with economic performance. High energy prices have fueled inflation, hit demand and crimped output. The record price of oil only five months ago undoubtedly played a part in the present slowdown.
Wednesday's production cuts were dramatic, but until the extent of the economic downturn becomes clearer, the recent slump in oil prices will be difficult to arrest and even harder to reverse. OPEC knows that the issue of price is one of supply and demand.
The U.S. government predicted Wednesday that demand for oil in the U.S., the world's largest oil-consuming country, is set to level off and is likely to remain flat between now and 2030.
Growing use of alternative fuels, such as ethanol; increased energy efficiency; a shift toward increased use of mass transit and a sharp decline in demand for and use of gas-guzzling cars and SUVs is shifting U.S. oil use downward, according to the Energy Information Administration in Washington.
In a report released Wednesday, the agency predicted that the use of renewable energy, including solar, wind, biofuels and tidal power, would grow by three per cent per year.
Overall energy use is expected to increase gradually, but at a significantly slower pace than expected a year ago.
The EIA, the arm of the U.S. government that produces official statistics on energy, also concluded that American reliance on imported oil will fall. It said that imported liquid fuels, mainly oil, would meet 40 percent of U.S. needs by 2025, down from 58 percent.
RECESSION SLOWING DOWN U.S. OIL DEMAND EVEN FURTHER
U.S. oil demand is weakening rapidly as the country slides deeper into recession. Figures from the International Energy Agency this month showed November demand in the 48 continental United States (excluding Alaska and Hawaii) was about 18.5 million barrels per day, down nearly 10 per cent from a year ago. That still represents some 21 per cent of global demand of about 86 million barrels per day.
U.S. reliance on imported oil from countries such as Saudi Arabia and Venezuela has also become a major political issue.
President-elect Barack Obama has pledged to reduce America's dependence on the fuel and this week appointed Stephen Chu as his energy secretary. Chu, a Nobel prize-winning physicist from the Lawrence Berkeley National Laboratory in California, is a proponent of alternative fuels and a developer of scientific solutions to climate change.
For his part, T. Boone Pickens, the Texas oil billionaire, has started a campaign to shift America away from its dependence on imported oil by building huge wind-power farms across a central belt of the U.S.
Without incentives to further reduce U.S. reliance on fossil fuels, the EIA forecast American carbon-dioxide emissions would continue to rise by 0.3 per cent a year, compared with an annual average increase of 1.1 per cent since 1990.
(Robin Pagnamenta is the energy and environment editor of The Times of London.)
# # #
Volume III, Number 83
Special Report Copyright 2008, Times Newspapers Ltd.
The 'Skeeter Bites Report Copyright 2008, Skeeter Sanders. All rights reserved.