Saving the Oil Cartel

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OPEC, the international oil-producing cartel, is fighting for its life amid tumbling oil prices and members' cheating on their quotas. That, says TIME business writer Bernard Baumohl, is the reason Saudi Arabia yesterday secured an agreement from Venezuela and Mexico cut oil output -- a deal quickly emulated by Kuwait, Iran and the United Arab Emirates.

Overproduction and falling demand caused by the Asian economic crisis and the unusually mild winter has sent oil prices plummeting, while cheating has bedeviled OPEC’s attempts to reverse the trend by cutting production. “Venezuela has been notorious for cheating,” says Baumohl. “Although in the new agreement they’re going to cut back production by 200,000 barrels a day, they were, in fact, producing 700,000 barrels more than their OPEC quota allowed,” says Baumohl.

If the deal holds it may result in a moderate price increase, says Baumohl. If it fails, the price could fall even further and OPEC may permanently lose its power to set prices. Either way, the immediate effect for Americans will be felt in the futures markets rather than at the gas pump.