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December 17th, 2008

OPEC Slashes Output to Reach “Fair” Price



The Organization of the Petroleum Exporting Countries (OPEC) concluded their 151st (Extraordinary) Meeting of the OPEC Conference today by cutting their daily output by 4.2 million barrels from September levels. Today’s announcement did little to bring oil prices anywhere near the range Saudi Arabia’s oil minister had hoped for at the beginning of the month. After the meeting, as of 11:40 a.m. EST, oil futures dropped by 7.4%, or $3.27, to $40.35 a barrel.

The over-$100 decline in oil prices since July forced OPEC to call two additional meetings in order to develop a production strategy that would return the price of crude back to a “fair” price. We reported at the beginning of the month that “Saudi Arabia’s Oil Minister Ali al-Naimi said $75 a barrel was a sufficient and fair target for oil prices that would keep global oil projects and production on time and efficient.”

Reduced consumption has continued to allow gas prices to decline. According to the U.S. Department of Transportation, “Americans drove more than 100 billion fewer miles between November 2007 and October 2008 than the same period a year earlier, said U.S. Transportation Secretary Mary E. Peters, making it the largest continuous decline in American driving in history.”

“The Secretary noted that Americans drove 3.5 percent less, or 8.9 billion fewer vehicle miles traveled (VMT), in October 2008 than October 2007, making it the sharpest decline of any October since 1971.”

The question remains whether reduced supply and demand can produce the price OPEC is looking for. While the latest statistics by the DOT only go as far as October, it will be interesting to see if consumption will change in the coming months as we’re only paying about $1.55/gallon here in northern New Jersey.

One thing is for sure, OPEC is determined to re-establish a “fair” floor under oil prices. “OPEC has a long-established record in meeting the challenges it faces, however tough they may be. The challenge facing the oil market today is clearly a formidable one. Notwithstanding this, we shall rise to this challenge — as in the past — and achieve our objective of stabilizing the oil market through collective discipline and adherence to our decisions. In doing so, we shall reinforce OPEC’s credibility in the market, as an Organization that is prepared to act at all times, in the interests of sustainable order and stability,” said HE Dr. Chakib Khelil, Minister of Energy and Mines of Algeria.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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