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OPEC Cuts Oil Production to Drive Up Prices

Posted: Dec 18, 2008 10:59 a.m.

The price of oil is too cheap for the nations that produce it. They've now agreed to the largest production cut in history in an attempt to reverse the decline in prices. In the short term, at least, the move failed to generate a price hike - but long term, the price we pay at the pump is expected to increase.

MarketWatch explains, "In an aggressive attempt to stem the recent collapse in oil prices, the Organization of the Petroleum Exporting Countries decided Wednesday to slash its daily production by a record 2.2 million barrels from current levels, but the oil market ignored the widely expected move and sent oil prices tumbling below $40 a barrel...Most analysts had anticipated a cut of about 2 million barrels a day, and oil futures fell sharply after the announcement."

Oil prices have declined from a record of nearly $150 per barrel this July. The AP notes, "In just five months, crude has given up all of the price gains made over the past four years."

For Americans, the OPEC cuts are likely to mean an increase at the pump in the future. Few analysts are willing to predict when gas prices will begin to rise or how high they will go - Americans have been driving less and less each month in 2008 and worldwide demand has fallen with the current recession. Peter Beutel, president of energy risk management firm Cameron Hanover, told USA Today, "An oil rally could last as long as five months...nudging crude to $70 a barrel and gasoline to more than $2 a gallon." Oil Price Information Service Chief Analyst Tom Kloza "forecasts a modest spring and summer rally that sends prices as high as $2.25 a gallon."

Either way, Time writes, "Enjoy the pump price while you can, because oil markets are likely to remain unpredictable for the foreseeable future."

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