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OPEC & CPB

October, 2006

After having enjoyed a recent, extreme high in the cost per barrel (CPB) of oil, OPEC is attempting to keep the price high despite recent decreases due to current, high reserves. The Organization of the Petroleum Exporting Countries (OPEC) is an international organization made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Since 1965 its international headquarters have been in Vienna, Austria, and is considered to be a cartel by some observers.

According to the OPEC website, OPEC's mission is to coordinate & unify the petroleum policies of Member Countries & ensure the stabilization of oil prices in order to secure an efficient, economic & regular supply of petroleum to consumers, a steady income to producers & a fair return on capital to those investing in the petroleum industry. Notice that it says nothing about providing fair prices to its largest consumer base, the US.

Oil prices have fallen some 25 percent since mid-July's record high of $78.40 which is a welcome trend for consumers but, OPEC apparently wants to keep the price as high as possible. The cost per barrel of oil had dropped to around $56 per barrel and OPEC began curbing production in order to get the price going back up. OPEC wasn't scheduled to have another meeting until December of 2006 but, the recent low in prices spurred them into more immediate action and they scheduled an emergency meeting on October 19, 2006. The main agenda for the meeting. cuts in daily production of 1 million barrels per day, the first cutback in production since April, 2004. This action was left as open ended statement, meaning that further cuts in production could be incurred by the end of the year 2006.

Saudi Arabian Oil Minister Ali al-Naimi, OPEC's most influential voice would seem to be the driving force behind the cutbacks and is also pushing for additional cutbacks at the December 14, 2006 meeting. Fortunately, OPEC, which supplies a third of the world's oil, remained divided on whether to cut from actual production of 27.5 million barrels per day or from its nominal 28 million-bpd ceiling, despite having already cutback production by some 400,000 barrels per day. A surprise buildup in U.S. crude stocks, approximately 5.1 million barrels, offset prices to some degree and has helped to keep prices from increasing.

The October 19th meeting resulted in OPEC producers choosing to a near future reduction in output by 1.2 million barrels, just over 4% a day, to halt the recent steep fall in prices and U.S. crude gained 75 cents to $59.25. Light sweet crude on the New York Mercantile Exchange dropped to an 11-month low of less than $57 a barrel in late October, despite the willingness (some consider that as more of a threat) of OPEC to reduce production.

Even though OPEC's decision to cut output by 1.2 million barrels a day initially triggered a rise in prices, we should be mindful that oil prices are still more than twice as high as they have been in recent years. OPEC, the group responsible for more than 30% of the world’s oil appears to be concerned about what seems to be a reduction in ‘demand growth’ and the possibility that other, non OPEC sources of oil may become available thus, cutting them out of the loop. The Hurricane season 2006 was fortunately much weaker than expected which allowed for Gulf Coast based platforms and refineries to maintain production resulting in an increase in global reserves and lower prices. Propane (LPG) is a renewable fuel that could help when it comes to stepping away from OPEC.

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