If the cost of production determined the oil price, crude would sell for something like $50-60 a barrel. The Organization of Petroleum Exporting Countries, or Opec, has another number in mind—$100. It has agreed to a small production cut to show it is serious about keeping oil in triple digits.
The announced 520,000 barrel-a-day cut is supposed to get supply down to the level of demand. Opec wants to remove 0.6% of global daily production. That’s roughly in line with the recent decline in demand. The International Energy Agency has cut its 2008 forecast by 1% since January.
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The swings in the oil price have been much more dramatic than changes in production or consumption. A barrel cost $99 at the beginning of this year, rose almost by 50% to $147 in July, and fell back to $103 as of Wednesday morning.
Saudi Arabia, the cartel’s thought leader and swing producer, helped trigger the sharp fall by increasing production.
But the Saudis certainly don’t want cheap oil. Their new target seems $100 a barrel. A year ago, when crude was selling at a then near-record $78, the $100 mark was widely considered a sign of an imminent energy Armageddon.
But experience can change people’s ideas about moderation. After a few months of record price expectations, stability looks like a good deal—at almost any price. If oil settles down after a 30% crude oil price increase over the course a year—well, that’s how things go.
Of course, it’s not easy to keep prices so far above costs. Eventually, high prices may stimulate too much production, or tighter money may reduce the amount consumers are willing to pay. But neither is an immediate prospect. So the $100 line could hold for a while.