Pumping less? OPEC has been mulling a production cut
TIME.com: What's OPEC trying to accomplish with these cuts?
Bernard Baumohl: Well, they look around and see the U.S. and the rest of the world slowing down economically, and they expect demand for oil to slow along with the global economy. So to avoid a glut that could push down oil prices, they're cutting back to keep prices at a level where they still turn a healthy profit.
It's like what the Fed tries to do — fine-tune supply so it matches demand. With Greenspan, it's money; with OPEC, it's oil. What they're aiming for is a per-barrel price in the $25-to-$30 range, which is just a little higher than what it is now, around $22.
How much of a cut will that take?
BB: Hard to say — it's a tricky game. It'll be up to them, and then prices will also depend on how much cooperation they get from non-OPEC producers like Mexico and Norway.
What will that mean down the road for the U.S. and the world economy?
BB: If they do carry out a cut in the neighborhood of a million barrels a day, that can't help the world economy. Just when things are slowing down, and governments are trying to avoid a hard landing, it can't help to have energy prices going up.
For the U.S., a lot will depend on consumers, and whether the slowdown has affected their summer travel plans. Between gasoline and jet fuel, if people are traveling in large numbers, that increase in demand — combined with production cuts — could push up prices over $30 again. And that's where it starts to be a real damper on the economy.
In other words, if the U.S. slowdown isn't as bad as OPEC expects, it could quickly get a lot worse?
BB: I told you it was tricky.
What recourse does the U.S. have if things get bad?
BB: Well, OPEC isn't trying to cause a global recession — if it turns out they've cut production too much, they'll probably be responsive with a change of direction. And Bush will also be able to look to Mexico, just as Europe will look to Norway.
In the recent past, non-OPEC countries have been pretty cooperative in not taking up the slack that OPEC leaves. But Mexico also realizes that a severe U.S. slowdown is going to hit them very hard, and as they try to diversify their economy — not to mention keep up the good start Vincente Fox and George W. Bush have gotten off to — that's the last thing they want. So they might be expected to help out in a pinch.
OPEC says its goal is price "stability" at $25 to $30 a barrel. As long as the production cuts turn out the way OPEC wants, it shouldn't cause the U.S. too much pain, because remember — almost half of the oil we use is pumped internally, so there's an economic argument for healthy oil prices here too. But if the price gets over $30, there are going to be problems.