OPEC agreed Wednesday to slash output for the second time in three months in an attempt to curtail a world oil glut that has sent prices plunging to the lowest levels in more than a decade.
In a compromise that delegates at the OPEC meeting here say was hammered out between rival powers Saudi Arabia and Iran, the cartel's 11 member nations agreed to cut production by roughly 1.38 million barrels per day, or about 5%. It was the cartel's second round of production cuts since March that, if successful, would meet the goals of most OPEC producers who want to remove at least 2.5 million barrels of oil a day from the saturated global market and put upward pressure on the price of oil.
But there were serious doubts whether OPEC members, whose manipulation of the market sent oil prices soaring and provoked a worldwide recession a 25 years ago, can exercise that kind of clout.
In recent years, the influence of the Organization of Petroleum Exporting Countries has diminished dramatically as oil-producing countries outside the cartel such as Russia and Norway pumped greater amounts of oil. Consumer nations in North America and Europe have been using less energy, thanks to mild winters and conservation measures.
In addition, Asia's economic crisis has greatly reduced demand in what was once the world's fastest-growing oil market. The first wave of turmoil in Asia struck late last year, just when OPEC decided to boost its output--a decision that only accelerated the collapse in oil prices.
After reaching $23 a barrel last October, crude oil prices plummeted last week to below $12. Many oil analysts are skeptical that Wednesday's action will push prices higher, given the social and economic pressures that compel many OPEC states to cheat on their quotas to boost their income.
Crude oil for August delivery rose 8 cents to $14.60 per barrel on the New York Mercantile Exchange on Wednesday.
Iran, Iraq and nonmember Russia are desperate to pump as much oil as they can to surmount economic problems that threaten social and political stability. While Iraq is supposedly restricted by United Nations sanctions to oil-for-food sales, U.S. and European officials acknowledge that Baghdad has been circumventing the sanctions by smuggling substantial amounts of oil through Turkey.
Although Russia and Iran are eager to sell much more oil, they have reluctantly held off because of technical problems and fears that a further surge in their output would send prices crashing below the threshold of $10 a barrel.
Iran, which is now pumping about 3.8 million barrels a day, agreed Wednesday to cut back to 3.6 million but only after Saudi Arabia approved a much larger reduction for itself and returned to a level of just above 8 million barrels a day. The Saudis maintained that level for nearly six years after the 1991 Persian Gulf War before its economic needs prompted a rise in output.
Iranian officials said the breakthrough was secured when Foreign Minister Kamal Kharrazi held intensive discussions with Saudi Arabia's King Fahd Tuesday in Riyadh. Iran's official news agency IRNA reported that Fahd expressed hope that the deal will usher in a new era of cooperation between Iran and Saudi Arabia.
The recent oil glut has prompted a collective fall in income of nearly $50 billion over the last year for OPEC members.
OPEC oil ministers said they felt there was no other choice but to make a dramatic gesture in curtailing production in the hope it will stimulate a price rise. "The price had reached such a low level that it called for a drastic decision. We need a real shock to the market," said Libya's oil minister Abdallah Salem el-Badri.