Production Cuts Expected When OPEC Meets December 17

The oil cartel OPEC is expected to announce further cuts in production of at least one million barrels a day, when its members meet in Algeria December 17. The aim is to shore up oil prices, which have fallen drastically in recent months.

Less than six months ago oil prices stood at a record high of just over $147 a barrel and predictions were they could hit $200. Prices have since fallen drastically and that has oil producers worried.

And, so for the 3rd time since September, OPEC is expected to cut production in order to try to shore up the price.

Petroleum analyst Mike Ala of the Imperial College London, said the loss of production is nonetheless a concern for producers.

"I mean, in the case of Iran, the 2nd largest producer in OPEC, 2nd exporter, its share of the cut-back in November was 200,000 barrels a day. Saudi Arabia's share was about 450,000 barrels a day. And, these countries can't go on cutting production because they do need the revenues for their development projects," he said.

Ala said even if production cuts drive up the price, producers will be selling less - and in the end, he said they will still lose money.

Ala also noted that previous production cuts have done little to drive up prices. The reality, he said, is that the oil price bubble has burst.

There are differing views as to why oil prices soared to nearly $150 a barrel earlier this year. Surging demand by emerging economies such as India and China were often cited as the main reason.

Not so, said Mike Ala - there were other factors at work.

"A lot of it had to do with perception - terrorism, political instability in some of the producing countries, like Nigeria, some South American countries. And, to a significant extent, to paper trading. World production is around 85 million barrels a day. Several times that was actually traded on paper," he said.

Ala said this paper trading and speculation by financial institutions such as banks and hedge funds drove up oil prices an additional $20 to $30 per barrel.

The current drop in oil prices is a welcome sign for consumers amid a global economic crisis and a world in deep recession.

Economist Waltraud Schelkle of the London School of Economics said lower oil prices are a stabilizing factor in today's world economy.

"Expectations that we use energy when we have a boom have gone down and oil prices react just like stock prices and go down in a violent way - it is a bit of a relief in that sense and actually they drop in prices are stabilizers of our business cycle."

When OPEC members meet in Algeria they are expected to agree on production cuts of at least one million barrels a day - maybe more. The question is what impact it will have on price.

In mid-December oil prices stood at around $40 a barrel. Petroleum analyst Mike Ala thinks the price will rise, maybe into the $70 range - mainly, he said, because of seasonal demand for fuel in winter in the northern hemisphere.