MOSCOW. (RIA Novosti economic commentator Oleg Mityayev)
Officials in many countries held their collective breath as they waited for the outcome of an extraordinary OPEC conference in Vienna on October 24.
The apprehension was natural, as the omnipotent cartel controlling 40% of global oil production was planning to dramatically cut oil production to check the plunge of global oil prices, something it hasn't done for two years. And it happened just as they expected: OPEC is slashing production by almost 1.5 million bpd starting November 1.
This scenario would have sounded absolutely fantastic a few months ago. Oil prices had been on the rise for six years, since 2002, driven by a stable and increasing demand for energy. In the past two years, oil prices reached unprecedented heights.
Therefore, OPEC members had absolutely no reason to restrict production. They employed their oil assets as fully as they could, and prices still inched up.
But ironically, the skyrocketing prices later became the reason for their own downfall. Western economies started to break down under the burden of exorbitant fuel costs, and have slowed into a recession.
The International Energy Agency (IEA), which represents developed countries' interests, said their demand for oil will drop by 2.2% by the end of this year, and the trend would persist. There isn't much hope that China and India, the two latest drivers of the growth in global oil prices, will be able to compensate for the plunge. Their economies are beginning to slow as well.
Last month OPEC made a half-hearted decision to cut production. The cartel leaders asked the members to harmonize their actual production levels with the quotas set, because they were really pumping 0.5 million bpd more than the 28.8 million bpd limit.
Apparently, the half-measure didn't help. Oil prices plummeted by more than half from their peak of nearly $150 in July.
That is why OPEC members urgently gathered in Vienna on October 24. The "hotheads" from Iran and Venezuela made a radical proposal to slash production by 2-2.5 million bpd. However, they finally compromised on a more moderate 1.5 million bpd.
At the same time, there is still room to maneuver, as the next OPEC meeting, slated for December, might cut production further after monitoring the market for a month.
The current market situation is grave for oil producing countries. The American WTI oil price fell by more than $4, to $63 per barrel, following the OPEC announcement.
Oil traders either considered the production cut insignificant or they do not think OPEC's efforts will make any difference, being thwarted by the general economic slowdown.
In any case, the cartel is quite likely to continue cutting production. The Russian government keeps its fingers crossed because, as Finance Minister Alexei Kudrin said, the country will make ends meet in 2009 only if Urals oil costs at least $70 per barrel. Now that U.S. WTI costs $63, our Urals won't sell at more than $60.
But even if Russia's budget withstands the blows with a little help from OPEC, one must bear in mind that the era of steadily rising oil prices is over, and we had better get off the "oil wagon."
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
