Oil prices fall despite OPEC cut

They must have been out of kitchen sinks in Algeria on Wednesday because OPEC threw everything else to try to halt the unprecedented slide in oil prices, pledging to cut production a record 2.2 million barrels a day on top of two previous reductions since September and issuing an invitation to Russia, the world’s No. 2 oil exporter, to play along.

It didn’t work.

January oil futures dipped below $40 a barrel for the first time in more than four years, trading as low as $39.88 before closing at $40.06 a barrel, down $3.54, on the New York Mercantile Exchange.

Prices are falling because the Organization of the Petroleum Exporting Countries, which pumps more than a third of the world’s oil, is up against too much skepticism, too much supply and too much bad economic news, experts said.

“OPEC is proving to be a little bit powerless,” said Phil Weiss, an energy analyst with Argus Research. “They can’t control the things that are causing demand to drop.”

The oil market even ignored the U.S. dollar’s falling to a 13-year low in value compared with the yen, a weakness that usually sends crude futures higher.

An OPEC statement from the meeting in Oran, Algeria, said the 13-member group had agreed to cut 4.2 million barrels a day from its production. About 2 million barrels of that reduction had already been announced since September.

But OPEC has repeatedly failed to back up its threats, experts said.

“If they really wanted to cut production, they would call in the big accounting firms and have them closely monitor output,” said Lester B. Lave, a professor at the H. John Heinz III School of Public Policy and Management at Carnegie Mellon University.

“They would set severe financial penalties for any country that cheated. In 35 years, OPEC has never done that. They all go home and everyone cheats,” Lave said.

Two other factors also weighed against OPEC. The Energy Department reported Wednesday that gasoline consumption fell 3.4% in 2008 and was on course to drop even more in 2009. It also said that oil supplies were 24.4 million barrels higher than they were in 2007.

And if OPEC was looking for big production cuts among non-OPEC members, it shouldn’t have counted on Russia, which some experts likened to the guest who dresses to the nines for a big event, then spends the evening turning down every request to dance.

Moscow sent what experts described as its most prominent OPEC delegation ever to the cartel’s meeting.

The team was led by Deputy Prime Minister Igor Sechin and included the heads of the nation’s five biggest oil companies.

It came amid talk that Russia might join OPEC or add to the 350,000-barrel-a-day cut that it announced in November.

But Russia sidestepped such pledges. Sechin held out the possibility that Russia could cut oil exports by 320,000 barrels a day in 2009, but stopped short of commitment.

Russia, which has always avoided coordinating with OPEC, is now seeking “special observer” status with the oil cartel. Although this is an apparent bid to move closer to OPEC, its significance is vague.

Russia has argued that its specific characteristics -- the mix of state and private companies operating in its fields, the ultra-cold Siberian winter, the lack of oil storage facilities -- make it difficult for the government to reduce and resume production with the ease of other big oil-producing states.

And Russia will not lightly give up its independence.

“They are trying to stay engaged but they don’t want to end up under anyone’s thumb,” said Paul Bingham, principal on the global trade and transportation practice of IHC Global Insight.

“As a freelancer,” Bingham said, Russia still has “enormous power, and they’ll still get invited to the OPEC meetings anyway.”

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megan.stack@latimes.com