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OPEC keeps oil markets guessing

Sam Eaton Oct 5, 2006

BOB MOON: This Thursday, October 5th, was a confusing day to say the least for oil markets around the world. It began with reports that OPEC had informally agreed to cut production 4 percent in the coming weeks. At first, that news pushed crude back above $60 a barrel.

Then, prices retreated when OPEC’s president denied those reports. But he kept the markets guessing when he conceded that OPEC is “toying with the idea of an emergency meeting” to discuss curtailing output.

Now, if you’re having a little trouble keeping track of all that, Marketplace’s Sam Eaton tells us that may be the whole point:

SAM EATON: If the U.S. is addicted to oil, then the oil cartel OPEC is even more addicted to the recent run-up in oil prices. With winter approaching, some saw today’s comments as a way of putting fear into the market in order to keep prices high. But Oppenheimer analyst Fadel Gheit says the important thing is to look at what OPEC does, not what it says it will do.

FADEL GHEIT: I don’t believe that OPEC would be motivated to cut production in light of $60 oil. They never thought a year ago that oil prices would be sustainable at $60, let alone touching off almost $80 and staying at much higher levels for most of the year.

Gheit believes prices must decline further for talk of production cuts to become a reality.

GHEIT: Basically, OPEC is able to produce oil probably at $20. But because of the social costs, because of the social spending that they must do to maintain the peace in their own countries, they need $45 oil.

Gheit says $45 is the magic number. Once oil reaches that level, he predicts production cuts of as much as 4 million barrels a day. That is if this disparate group of countries can all agree on it.

Wachovia economist Mark Vitner says even decisive cuts from OPEC can be problematic.

MARK VITNER: The problem is there’s nobody in place that would monitor that production cut and there would be a huge incentive for countries to cheat. And to say, “Well, I’m Venezuela and I’m going to keep pumping the oil, and I’m hoping that Nigeria’s going to stick to their end of the agreement and cut their production, but I’m secretly not going to cut mine.”

Today’s talk of production cuts did draw angry reactions in Washington. Energy Secretary Samuel Bodman said the U.S. still needs all the oil it can get. He says he plans to get in touch with OPEC members to argue that point.

In Los Angeles, I’m Sam Eaton for Marketplace.

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