Opec accepts hard reality

Opec has finally turned bearish on oil prices. At a meeting in Vienna over the weekend, the oil producers cartel refrained from cutting production beyond the 4.2m barrels per day pledged last September – 12% of the 2007 daily average. The cartel also admitted that it won’t achieve its price goal of $75 a barrel this year.

The restraint is sensible. Opec’s statement that it is worried about the fragile state of the economy could earn points for good public relations. The cartel is pitching in to prevent a destabilising oil price spike. Such solidarity will play well in big oil consuming nations, noticeably the US.

The restraint, though, was pretty much making the best of a weak position. Opec did not have much choice. With demand down, it would take big cuts in Opec quotas to push the price up by two-thirds to Opec’s stated target.

The members of the cartel, which produces more than a third of the world’s oil, wouldn’t agree to take the revenue strain. As it is, only 80% of the agreed September production cuts have been made, according to the International Energy Agency (IEA). That leaves about 800,000 barrels of daily production to be removed from the market.

Saudi Arabia, the cartel’s most influential member, has stuck to its production cuts. But leading members including Iran, Venezuela and Angola, are still producing beyond their quotas, according to the IEA. Meanwhile, big non-Opec members, such as Russia, have kept up production.

Saudi Arabia may be tired of carrying almost all the weight of production cuts. But whatever the internal Opec politics, it certainly doesn’t make much sense to set unrealistic production targets. Opec’s credibility and authority are at stake. If those are lost, the always fragile cartel could be weakened. So Opec has followed an old maxim: when you can’t get what you want, it is better to want what you can get.