OPEC's cuts mean no oil shortage.

On October 20, OPEC, the Organization of Petroleum Exporting Countries, announced that 10 of its members would "reduce production by an amount of 1.2 million barrels a day, from current production of about 27.5 million barrels a day, to 26.3 million barrels a day, effective 1st November 2006." The move comes after the price of oil declined steeply over the past few weeks. Bloomberg News, reporting on October 23, noted: "Prices have plunged 25 percent from the record of $78.40 a barrel reached July 14." Both the rapid plunge in prices and the OPEC decision to cut production prove conclusively that the previous high oil prices were not due to a shortage of oil.

In a condition where the supply of a commodity exceeds demand, the price for the commodity must fall. That is just what has been happening with oil. There never was a shortage of oil, per se. The shortages were in refined fuels and were made possible because of a series of bad policy decisions that have, over the years, led to reduced refinery capacity and laws calling for the production of relatively small batches of "boutique fuels" tailored to small geographical markets. That there was and still remains enough crude oil is reflected in the fact that oil prices continued to fall even after the OPEC announcement.

In fact, wrote Raymond J. Learsy, author of the book Over a Barrel: Breaking the Middle East Oil Cartel, "something unusual happened. Not only did the spot market prices not go up, they actually fell by $1.68/bbl or 2.7%! For once the oil consuming public long conditioned these past years to react with Pavlovian obedience to every OPEC and oil industry's pronouncement that peak oil is at hand, that oil will soon be running out, has, at last, taken a different tack. Why? I believe the market is finally recognizing that oil at current levels is not scarce."