OPEC yesterday agreed to cut oil production by about 4 percent in an effort to prop up falling prices.
The Organization of the Petroleum Exporting Countries acted after several months of high oil prices did not have the detrimental impact on the global economy that many feared. The oil producing countries have seen their oil profits slump as prices have plunged to the $40 a barrel range from above $55 a barrel in October.
OPEC said in a prepared statement that the decision had been made "in order to prevent crude oil prices continuing to deteriorate to undesirably low levels."
The announcement, made at a meeting in Cairo, did not immediately have its desired effect on oil markets. Prices fell as oil traders concluded member countries would ignore the cartel's production ceiling as they often have in the past, analysts said.
U.S. benchmark crude oil for January delivery on the New York Mercantile Exchange declined $1.82 a barrel yesterday to close at $40.71. Prices have declined in recent weeks in part because of unseasonably warm temperatures, which cause lower demand for home heating oil, and the restoration of production in the Gulf of Mexico, where storms had damaged oil production equipment.
Even with the declines, oil prices are still high because of increasing demand that has pushed production close to its limit. Oil prices are 29 percent higher than a year ago.
OPEC's decision marks a shift for the cartel. Just three months ago, when prices were slightly higher than they are now, oil ministers said they wanted to bring down the cost of oil. OPEC members worried that high prices would harm world economies and encourage the use of alternative fuels, decreasing the demand for oil.
"They're trying to find the sweet spot," said Nariman Behravesh, chief economist for Global Insight Inc., an economic research firm in Lexington, Mass. "What they want are oil prices that are high enough so that they're taking in money hand over fist but not high enough that it kills off the goose that laid the golden egg."
Oil prices have slightly depressed world economic growth, he said. But, as world economies have become more oil-efficient, higher prices have had far less of an impact than in years past.
At its meeting, OPEC decided to strictly adhere to a previously set production ceiling of 27 million barrels per day beginning Jan. 1. Ten of the cartel's 11 member countries are producing about 1 million barrels per day above that amount. The 11th country, Iraq, is not included in the production targets. The cartel plans to meet again Jan. 30 to consider further production cuts. Analysts said OPEC has been producing at its highest rate in 25 years to supply the world's increasing thirst for oil.
"We have done everything to moderate the price," Ali Ibrahim al-Naimi, Saudi Arabia's minister of petroleum of mineral resources, told reporters in Cairo, according to Bloomberg News. "The price is moderating, and it will probably moderate more" as fear of heating oil shortages eases, he said.
The impact of OPEC's decision on consumers is hard to predict, analysts said. Gasoline prices have been declining at the pump as oil prices have fallen. Yesterday, a gallon of regular gasoline was selling for $1.88 nationally, about 10 cents less than a month ago, according to a AAA auto club survey.
Analysts said that supplies of gasoline are strong and that they do not believe OPEC's decision will lead to a price increase. However, they said that could change if the weather turns colder and demand for oil increases significantly.
Still, gasoline prices "probably would be lower" if OPEC continued producing at the current level, said Douglas MacIntyre, a senior oil analyst for the Energy Department's Energy Information Administration.
Academics and analysts cast doubt on whether OPEC, whose members supply about 40 percent of the world's oil, would really pump less.
"Production will stay the same," said A.F. Alhajji, an economics professor at Ohio Northern University. "Who is going to cut production at $40 a barrel to sell it at a lower price later on?"
The Bush administration declined comment on OPEC's decision. Energy Department spokeswoman Jeanne Lopatto said, "We would prefer that producers leave issues of supply and demand to the free market to decide."
Officials from the International Energy Agency, a Paris-based adviser to 26 industrialized countries, had called on OPEC to continue to production at the same level.
In a report released yesterday, the agency said: "Producer concern over a precipitous fall in prices is somewhat overstated. Plus forty dollar oil is still high and capacity constraints, geopolitical uncertainty and demand growth will not disappear overnight and will continue to provide price support over the medium term."
Members of OPEC have been particularly concerned about a growing gap in the price of the most desired light, low-sulfur oil, and heavier high sulfur varieties. That gap has been widening, in part because OPEC countries have increased production of heavier oil but there is limited refining capacity to process it.
To sell the heavier oil, producing countries have had to significantly discount the prices. Analysts said that they expected much of the production cut to be in heavier, less-profitable grades of oil.
Speaking to reporters in Cairo, OPEC members said they wanted to cut production to prevent oil prices from plummeting.
"The downward trend seemed to us to be a bit too rapid," Algeria's energy minister, Chakib Khelil, was quoted by Agence France Presse as saying. "And it appeared that if we did not take this sort of decision, the prices would not stabilize and we would find ourselves in a situation where we couldn't control the stability of the market."
