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OPEC makes record cut in production

Saudi Arabian Oil Minister Ali al-Nuaimi, center, gestures during a photo session at an OPEC meeting in Oran, Algeria.

TEXT OF STORY

Tess Vigeland: Alarmed by the plummeting price of oil, OPEC ministers today announced a record cut in future output -- 2.2-million barrels per day beginning January 1st. That, coupled with a production cut announced earlier this fall means producers will be pumping nearly 4.5 percent less oil than a year ago. Even so, prices on world markets hit four-year lows today. John Dimsdale explains why.


John Dimsdale: OPEC's target price for a barrel of crude is $75. Today you could get a barrel for just over 40 bucks. Even though the production cut is the largest in its history, OPEC, for now at least, has lost control over the price of oil, says Deloitte analyst Joseph Stanislaw.

Joseph Stanislaw: Demand is in freefall. What's driving demand right now is not the price of oil. What's driving demand is the global economy and that's in freefall as well. Until we know when the global economy turns around, we won't know when oil demand turns around.

More evidence today that demand will continue to drop: the Energy Department reported oil and gasoline reserves in the U.S. are up over the past week. And then there's market skepticism that OPEC members are disciplined enough to stick with their production cuts.

Fareed Mohamedi with PFC Energy says oil producers grew dependent on the income from triple digit prices for oil and set their budgets accordingly. Now there's a lot of internal bickering over production levels.

Fareed Mohamedi: You know, Rome was burning in a sense while OPEC was fiddling. Now it's going to take a little bit of convincing to turn it around and show that OPEC is serious and the market will be watching very carefully if new quotas are met.

And if OPEC cuts production too much, they risk starving the world economy into a steeper downturn. Not enough and the oversupply will keep their commodity cheap and bring less profit. For now falling oil prices are giving the Federal Reserve the inflation protection it needs to keep interest rates near zero.

In Washington I'm John Dimsdale for Marketplace.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.

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